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Many of our private business Clients have their first conversation with us about exit strategies for leaving their business. Those of us who start and run our own business usually have two questions. The first is how much is the business worth and the second is when it’s time for me to leave, how do I successfully get out?
The conversation often starts when the owner of the business is burned out and has no interest in continuing. This is a very bad time for you to get serious about exiting your business. Many times when you’re feeling burned out and tired of the day to day grind, your business is at a low point in its value to others.
If you want to maximize the value of your business, you should make sure your business has a good value when it’s time to leave. Your business will have its highest value when the business is running well and profits are good.
We tell our Clients that it’s important for you to always have your business ready for sale. This means that you want to run your business as if you are going to take to market tomorrow.
Four ways to sell your business
If you are going to leave your business and have someone else take it over there are four ways of leaving your business. They are as follows: selling to an outsider, selling to your managers, passing your business to family or liquidating the business.
Each of the four methods of leaving your business has different challenges and opportunities. If you are thinking about leaving your business in the next five years, we encourage you to have a conversation with one of our Associates. We can help you plot a strategy that is appropriate for your particular situation.
Selling to an outsider
When selling your business to an outsider, the most important thing to understand is what motivation of the buyer might have. The buyer’s motivation is often the determining factor in what value your business will have.
If the buyer is purchasing your business as a financial purchase, their motivation will be a return on investment. A buyer might also want to purchase your business for a strategic purpose. Under this circumstance, they are often willing to pay you more for your business because your business there is something strategic in your business that the new owner wants to have.
It could be a product they think they can capitalize on, overhead they know they can consolidate or an operational strategy that has value to the acquiring company. All of these items can cause a buyer to pay more than any other buyer for your business.
Selling your business to an outsider or a third party should always focus on getting the most money for the sale of your business. Buyers often make promises they have no intention of keeping. They will run your business the way they want after they purchase it. You will have no control over how the business is run, how your people will be treated or where the business is located. For this reason, you might as well concentrate on getting maximum value for your business.
Selling to managers and family
Managers and family members almost never have the money necessary to purchase your business. You will be holding paper or be their bank for the sale of your business. Because of this, it’s crucial that you feel very comfortable that your managers or your children have the ability to run the company and have the ethics to pay you what they owe.
It’s possible to sell to your managers or children and get the full economic value for the business. To realize this value you must use advanced tax management strategies when you make the sale. We recommend you speak with planners who understand inside sales to managers and can help manage taxes that allow the seller to keep more money.
When selling to your children, you will want to think about treating all of your children fairly. We often see children in the business and those not in the business treated differently. We have several strategies that help selling owners transfer their business within their family and have all family members treated fairly.
Conclusion
Exiting your business is one of the major events you will have in your business life. It’s important that you plan for this event with extreme care. Most owners of private businesses will sell their business once or twice in their life. When the event happens, make sure it’s done to your satisfaction. Working with a professional who understands the workings of an effective exit strategy is a good way to start.
If you would like more information or support from our firm, please visit us online or e-mail us and your Stage 2 Associate will get back to you.
With Warm Regards,
Stage 2 Planning Partners
Josh Patrick © 2006
Securities and Investment Advisory Services offered through NFP Securities, Inc., A Broker/Dealer, Member NASD/SIPC and a Federally Registered Investment Advisor.
Stage 2 Planning Partners is an affiliate of National Financial Partners Corp., The parent company of NFP Securities, Inc. Representatives listed on this website are currently registered to conduct securities business in the following states: AZ, CO, CT, FL, IL, IN, MA, MT, NC, NH, NY, PA, RI, VA, VT, WA
NFP Securities is not affiliated with Harris- Murray
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