Courtesy of GRand Rapids opportunities for women
When you start a business, it’s often to realize a dream, follow in the footsteps of family or friends or meet a need in the world. You see an opportunity, start it, nurture it and work hard — ultimately growing it into a successful business. At some point, your mind turns to what’s next, and that can mean selling your business.
A natural reaction to this change is a mixture of anticipation, sadness and anxiety. The sale of your business is as big of a step as starting it in the first place. A positive way to approach it is not to think of it as an end but as the beginning of the next phase of your journey.
We talked with GROW supporter and former board member, Peggy Murphy, a certified public accountant and shareholder at Hungerford Nichols. She is a specialist in advising small business sellers and recommends that business owners start planning for this milestone five years prior to selling.
Here are three business succession planning categories to consider.
Understand why you’re selling.
The goal of selling your business should be a smooth transition into what’s next for you and the business. The first step is understanding why you’re selling and setting your goals and expectations accordingly. Some of the most common reasons to sell a business include passing it to the next generation, an unexpected life event or approaching retirement. Typically, in a sale to fund retirement, your goal will be maximizing the value of the sale. For Denise Kolesar, former owner of Kohler Expos and a GROW mentor, changing family plans prompted her to kick off a three-year process that ended with the sale of her business in 2016. She had a long-time trusted employee as a potential buyer, which Murphy states is not unusual. Thus, Kolesar’s sale had the characteristics of a succession event rather than a sale to outside buyers. In this situation, Murphy’s advice is to “have successors be part of the planning process.”
Prepare your business.
A realistic business valuation is a crucial early step and will be the basis for future discussions with bankers and buyers. To ensure a strong valuation, get your house in order.
“Buyers will be looking at five years of records, keep them clean,” Murphy said. “Address problem employees and build a good management team.”
Key financial topics are funding and taxes. Some buyers may request that sellers defer payments over time, so in effect, you’ll be acting as a banker for the buyer. If the business starts to perform poorly after the sale, your proceeds may be at risk. Tax considerations should be part of the planning conversation from the beginning to ensure your tax liability is minimized.
Legal considerations involve the accuracy of representations you make to the buyer prior to the sale and how this aligns with the reality they encounter after the sale. It is recommended that you have legal experts ensure paperwork is done correctly and contracts with customers, landlords and key employees are renewed and transferable to the new owners.
Selling your business, just like starting it, can be an emotional process. Your business has been a constant presence in your life, including close employees who are often friends. Sellers often worry about what will happen to employees after the sale, and it is a valid concern. Both Murphy and Kolesar recognized the emotional part of a sale in both positive and negative ways.
“The emotional component is the most important factor,” Murphy said. “Most owners of small businesses truly care about their employees, their customers and vendors, which can lead to delaying a sale.”
When asked about the best part of the sale of her business, Kolesar said, “Selling it to someone I knew. I may have gotten more money (with another buyer), but I wouldn’t have gotten the same character.”
The length of the planning process can help you adjust to the emotional aspects, but Murphy warns of “seller fatigue” if it stretches on too long. Going into the process, be aware that it will likely be more work and take longer — several months to more than a year longer — than you may like.
The diligence and care you brought to the process of starting and building your business will be needed when you’re thinking of selling.
If you’re looking for advice on succession planning for your business, there are many resources available, including GROW, your financial advisors, tax advisor or accountant and business mentors.
“Bring all the pieces to the table at once to go over the numbers and see what’s right for you,” Kolesar said.
“You’re playing poker,” Murphy added. “Advisors help you get the best cards and play them at the right time.”
GROW is a service focused on entrepreneurs at various stages of business ownership, providing resources to help with every step of starting a business, empowering and supporting clients with funding options and professional expertise for a lifetime.