(Part 1 of 2, This edition address selling your business, next edition we discuss buying a business.)
When a business owner gets closer to retirement, there is an element of uncertainty and expectation that starts to swell. You know how much work it took to build your business, and you want someone to understand and appreciate all the stress, the late nights, the tears, and the exhilaration that have gone into making your business what it is today. You want to make sure your good name and your people are protected, and you want to be fairly compensated for all your work.
There are three things to remember in selling your business: Know the Value, Maximize the Value, and Find the Culture Fit.
Know the Value.
Jason Early, Chief Revenue Officer of Biz Equity says “98% of owners don’t know the value of their business.” Where do your customers come from? How much does it cost to get a new customer? Do you have a system in place to attract and engage new customers? How well does that system work without you (and your star personality) running it? What part of your business is most profitable and what part is most costly?
Kitsap company – Owners of a tools and equipment business were on the verge of retirement and they took a hard look at their company to figure out where the best profits were coming from. They found that one product line in particular had great margins, dependable suppliers, and repeat customers. They separated this one part out, sold the rest of the business and have run this one product line from their home as a retirement project. They got the money from the sale, and five years later(!) they are still getting a steady stream of income from the part they enjoy doing. They found the value in their business and earned a double benefit.
Maximize the Value.
After you know your value, you need to maximize it. What is the actual EBOC (Earnings Before Owners Compensation). Any business owner worth their salt is maximizing write offs and using IRS approved loopholes to legally increase their compensation and decrease their taxes. What things are you legally deducting or writing off that the new owner could keep as revenue? Greater revenue combined with financial transparency is very attractive to the buyer.
Many times the best way to maximize the business is to improve debt management. Reduction of liabilities equals better cash flow. And track your trends, what are your strengths and your faults? No business is perfect. Buyers don’t expect the business to be perfect, they are often looking for ways to buy it and improve it right away. But no one likes bad surprises and Kitsap is too small for bad deals. Do the right thing and a lot of people know about it. Do the wrong thing and everybody knows about it. Work for the win/win business deal.
Find the Culture Fit.
Author Ivan Misner, the father of modern networking, says “Culture eats strategy for breakfast every time.” Culture fit with the buyer and seller is key; values compatibility means you speak the same language. You both need to know where does the company go from here and what are the intentions of the seller and buyer for the next five years?
Kitsap business – A local waterfront business owner introduces the new buyer to the staff several times so the staff feels comfortable with the transition. The new owner gives the staff a few more vacation days per year which helps with morale and staff buy in. The buyer and seller have the same work ethic, and both know the industry very well, and we help structure the deal in two parts to help the buyer with cash flow and the seller with tax deductions. Cash up front plus a trailing payout to the seller for three years of consulting services. This allows for a major opportunity to reduce taxes because the trailing payout is not going to the seller, it’s going to his newly formed consulting business, which gives him the opportunity for write-offs and deductions. Plus the seller staying on as consultant benefits the buyer because it gives the buyer help and advice in running the new, bigger business.
This is the tip of the succession iceberg, but start with Know the Value, Maximize the Value, and Find the Culture Fit.
Advisory Services offered through Strong Retirement Solutions; an SEC Registered Investment Advisor.
