How To Know When You are Ready To Exit Your Business
The answer to this challenge is both situational and personal.
Whether you plan on leaving the business altogether or you want to work as long as you are able, most people agree that achieving financial independence should be a primary goal. You may want to work until your 80 but you shouldn’t HAVE to work if you don’t want to or can’t.
I have created this matrix for my clients to be able to know where they stand.
Not able, Not Ready
Your business cannot be sold for full value and you are dependent on the value of the business to give you financial independence. If you have it, you need more time.
You need a plan to increase cash flow, create wealth independent of the business and create value for a potential buyer.
Ready, Not Able
The sale of your business will not result in financial independence. You are ready and the business is ready but you need time to develop alternative cash flows.
Able, Not Ready
The net proceeds of a sale combined with personal investments will enable you to be financially independent. However, you and/or the business are not ready to exit. If the business is not ready to optimize value then you need a plan that will get you there.
Ready and Able
Congratulations! This is the best of all possible worlds. You can choose your timing and know that you will be able to accomplish what you want. You need a plan to mitigate the risks of continued ownership.
Big Question!! How much should the value of a funeral home be discounted if the facility is being sold for other use?
A funeral home in your area has accepted an offer for their real estate that is much greater than the business is worth. How much would you discount the value of the business if you were able to buy the name, phone number and files as well as any other equipment?
Let’s say the business WITH the real estate is valued at $1,500,000. Their business is steady and the owner is willing to help in transition but plans on retiring as soon as possible. What would you be willing to pay?
Hint:
Assuming a market with average competition I believe closing a facility and transitioning to new ownership could impact 30% to 50% of volume
If it is in a two competitor small town I would lean toward 50% if it wasn’t sold to the competitor
I know “IT DEPENDS” but let’s get some collective opinion going here. Give me your ideas in the comments section. I will answer all questions and publish my “mathematical” approach (if someone else doesn’t” in two weeks.
Remember that bill congress needed to pass to see what was in it? Well, surprise!! The Medicare Tax has been expanded to include almost ALL income (active and passive) over $200k for singles and $250k for couples. This even includes the gain on the sale of a personal residence over the exclusion amount.
If the Democrats win it is likely the capital gains rate will also increase to 20% and some are saying it could go to the pre-1996 level of 28%. Here is an example of how it will work:
Let’s say you are married and your annual income from your business is $125,000. Your spouse works elsewhere and earns an income of $50,000 for a combined income, or AGI, of $175,000. (NOTE: for most of us the trigger will be our Adjusted Gross Income, NOT our Net Taxable Income). If you realized a $1,000,000 taxable gain on the sale of your business this year (2012) your taxes on that sale would be 15% or $150,000 leaving you $850,000. If you sell the business under the same circumstances in 2013 your capital gains tax is likely to be $200,000 (20%) and some think it may be $280,000 (28%). Then comes the Medicare tax of 38% on the amount over $250,000. In your case this would be AN ADDITIONAL $35,150 on top of the capital gains tax!!!
Of course with any tax change there are nuances and it is not my purpose to practice taxation (or, for that matter to influence your vote). If you are at the point where you are thinking about the possibility of selling the business (whether to an acquisition firm or to a family member) better to do it this year than next. If you are enjoying what you are doing and want to stay in the game then it is likely (at least in many instances) that the appreciation in value over time will partially offset this loss in value.
See your tax planner for specific information.
This Post May Not Be Reproduced Without Permission. You may, of course, forward it as a link in its entirety to any parties you feel may be interested. If you publish your own blog or electronic editorials and want to link back to this article contact me at alan@alancreedy.org
Selling a business is a highly practical exercise wrapped in a thick emotional blanket. Much like the grief cycle we know so well in DeathCare there are stages that are common and, if you know about them, you can prepare. The more prepared you are the better you will be able to negotiate what you want.
Stage 1: The Reality Check
Your baby may not be ugly but it isn’t the most attractive either. Pride of ownership or what you think you need to live on post sale often cause us to be unrealistic in our expectations. The process of negotiation is a process of compromise to find the common ground between the lowest possible price at which you are willing to sell and the highest possible price someone else is willing to pay. Read this article to learn how to find that middle ground for yourself before you start.
Stage 2: Prepare to Negotiate
It is said that a lawyer who represents himself has a fool for a client. In almost all instances the party on the other side of the table will have done this before and not only will this be your first time but you will be emotionally involved. The need to master a very steep learning curve and to be objective will put you at significant risk. All your life you have been in charge. Now you have to put yourself in someone else’s hands and do what they tell you. One of my best clients was an incharge type who really struggled at this stage. He decided that the best way to cope was to take several negotiation seminars outside the industry. Not only did this help him to deal with his need for control but it made him a formidable partner in the process. The result: he got more than either of us could imagine because we were working together rather than tugging and pulling
Stage 3: Be prepared to lose your leverage:
There comes a time in even the best conceived plan where you will lose leverage. One way large acquisition firms accelerate this shift is by purposely seeding rumors that put pressure on you to speed up the sale before everything “comes apart”. But the official shift comes when you accept the Letter of Intent (LOI) of one company which usually contains a “no shop” clause. It is then that the true due diligence period starts. It is a common belief in the Eastern and Middle Eastern world that negotiation only really starts at the closing when the seller is at a disadvantage. This practice has been accepted now in the Western World and so you might expect a 10% to 20% reduction in price between LOI and Closing. I have frequently found it effective to provide as much of the due diligence in advance of the LOI so that that offer is based on the information to date and require that any negotiation after LOI be limited to new information that might be uncovered. I just HATE surprises.
Free tip: no matter how badly you want to sell or how much pressure is on you ALWAYS be prepared at the closing to “quietly close your briefcase and go home” if things don’t go your way. I coached a real estate friend recently in this when she was selling a house to someone from the Middle East and she was concerned about the closing. She said that the attempt at negotiation lasted for about an hour and stopped immediately when she and her client got up to leave. This strategy is bad behavior if there are no real issues and your best defense is to simply walk away.
Stage 4: Be Prepared to Be Outed
It is the rare sale that isn’t discovered before the closing. At a minimum your unusual behavior and activity will cause people to wonder and suspect. Beware of the person who pretends to already know in order to get you to confess. Make sure actual knowledge is limited to as small a circle as possible including your best friend. But most importantly be prepared with how you will respond and what you will say. Practice in a mirror because people will look beyond your words for how they should respond.
Stage 5. Post Partum Depression
As with the real kind this varies by person. But, if you are like most people, there will be some. If you decide to stay on after the sale you will have to adjust to being an employee and not having a final say. Whether you go or stay you will have to adjust to a new self identity. One of my clients told me it took him 6 years after the sale to actually publicly admit he was retired.
Summary:
For most businesses this is the single biggest and riskiest step they have ever taken. Because it is an independently owned business it is highly charged and personalized with emotion. Preparation and focus are keys to success. It is a process and it takes courage and strength. I often tell my clients to go to negotiation seminars to fully understand how it works and what to expect. Having a professional negotiator represent you will pay for itself and then some. But in the end you will make that final decision.
