How to evaluate if you are really ready to turn over the reins
Walking away from your life’s work is a big step that doesn’t come without its obstacles.
Determining your readiness to sell your business — sans any pressing circumstances to do so — largely comes down to two factors: 1) your financial readiness to sell a company, and 2) your emotional readiness to sell a company.
Assessing Your Financial Readiness to Sell a Company
Your financial situation, the easier of the two factors to consider, is oftentimes the one most overlooked by sellers.
The key question is whether the proceeds you will receive from selling your business will give you the financial means to leave the business.
For most business owners, the value of their business is a large chunk of their net worth. Unleashing that value is critical to reaching their post-sale goals. You’re one of the lucky ones if the proceeds of your sale are not required for you to retire or move on.
On the flip side, selling a business involves cutting off your access to the money you’ve been drawing out of the business every year. Ideally, the proceeds from the sale of your business will be large enough to cover your obligations going forward.
How much money do you need and what sale price will give you what you need? Can your business command that price or anything close to it? If not, now may not be the right time to list your business for sale.
To best assess your financial readiness to sell a company, it’s often a good idea to engage the services of a reputable wealth manager, an individual who can analyze your entire portfolio and calculate your post-sale needs.
One of the key steps in completing this financial analysis is engaging with a knowledgeable independent third party to value your business. As business valuation is a complex matter, it should only be undertaken by professionals with the appropriate certifications, years of experience and access to a database of comparable transactions. Most business intermediaries will have a handful of appraisal and valuation firms that they work with on a regular basis, and can offer a recommendation.
After receiving a completed business valuation, your wealth manager can now appropriately analyze your portfolio and understand whether or not a sale will yield enough money to fund your projected retirement and allow you to sustain the lifestyle you want post-sale.
If the proceeds from the business sale are not enough to allow you to leave the business, you may need to focus on spending a few years to build up the value before you sell, or you might consider lowering your targeted financial spend after the sale. Alternatively, you might need to come up with a way to supplement your income and bridge the gap.
Assessing Your Emotional Readiness to Sell a Company
The more elusive part of evaluating your readiness to sell is your emotional readiness. Can you really walk away from the business you built for so many years?
While most transitions will require the seller to stay in touch with the new owners for some period of time, there is still that moment when your services will no longer be needed. What are your plans for when that day arrives?
It’s best if, as a business owner, you can detail exactly how you are going to spend your days after the sale. This gives a clear indication of whether or not you are ready to sell. For instance, will you plan trips and activities with friends, kids and/or grandkids? Will you pursue a hobby? Or perhaps even run a smaller business in a completely different field? If you cannot describe post-sale life, you should question your sale decision.
While there might be some legitimate reasons an owner has not planned this next phase – burnout, a partnership break-up or an illness – a seller’s motivations matter in so many ways.
Knowing the seller’s ‘next steps,’ and motivations for selling, can be extremely important in the actual transaction process. It can be an indication of how they will handle a business negotiation, their willingness to provide the necessary training and transition to a new owner, their flexibility and patience with a deal, and most importantly, their receptivity to heeding the advice of any professionals helping to manage the transaction.
The story of a seller who owned a niche manufacturing business illustrates the importance of assessing emotional readiness to sell.
The seller’s business was very unique and had great fundamentals. It was in a great position to attract multiple buyers and, in fact, six very substantial offers were made to the owner shortly after it was listed for sale.
Unfortunately, none of those deals were consummated. Why? It really came down to the fact that the owner was just not emotionally ready to walk away unless he received an exorbitant — and unrealistically high — offer. He had engaged the expertise of a business intermediary, took the time to meet with many different prospective buyers, and appeared to be committed to selling. Yet when the moment arrived, he could not disengage from the business and he created veiled objections that boiled down to the fact that he just wasn’t ready to sell. The net result was that the time, energy and capital of many involved parties was wasted.
To this end, it’s really important to ask yourself the tough questions before pursuing the difficult and long task of marketing your business for sale. Will you have the necessary funds for your desired post-sale lifestyle, and are you emotionally ready to pursue a life after business ownership? If you cannot develop a post-sale picture of your life, you may need to keep running the business — assuming you have the will and drive to remain competitive and relevant.
DOMENIC RINALDI is the Managing Director of Sun Acquisitions which is a lower middle market M&A firm focused on sell-side and buy-side transactions. He was awarded the professional designation of Certified Business Intermediary from the International Business Brokers Association, and is considered an expert in the field of mergers and acquisitions. He is a seasoned executive who brings over 24 years of proven experience in merger/acquisition, sales, service, marketing and operations to his clients.