Three Years before Selling Your Business: Three Things to Do
You’ve spent your life sacrificing, focusing and doing everything imaginable to grow your business. Now you’ve reached the stage where you’re ready to think about selling.
This thought of all your possibilities can feel overwhelming.
In order to help work through the process and concerns, we’ve built a three-part series on selling a business. We’ll walk through what should be done three years, three months and thirty days before a sale. These steps include legal, business planning and financial considerations.
Three Years before Selling Your Business: Three Things to Do
Identify Qualified Candidates
You’re busy and have been for decades. Finding time for a meeting about a future sale takes the lowest priority. Your buyer, growing their own business and career, shares this pressure for time.
For that exact reason, you need to begin now with identifying qualified candidates to purchase your business. These meetings will take months to screen the first round of conversations and move into more detailed discussions.
In your first meeting, you want to introduce your approach to business, customer focus, staff, business development efforts and reasons for selling. If you’re concerned about the buyer using this information in their own business, you should request an NDA that precludes them from taking action on your conversations.
Notice the list of items to discuss doesn’t explicitly include financials. This is because a conversation around financials naturally arises from discussions on how you’ve built the business, your staff and business development efforts.
In addition to the topics about your company, you’ll want to learn about the potential buyer. Common areas include background, goals, long-term industry outlook and thoughts on your business. It’s also beneficial to learn whether the buyer has previously completed an acquisition. This can help you learn what changes they would make in this acquisition process.
It’s also important to feel a rapport in your conversations. You’re going to be spending hundreds of hours with the buyer, and you want to know that the business is in good hands. In order to feel good about the business’ future, you need to have that relationship between the potential buyer and yourself.
Clean Up the Books
Owning your own business brings an entirely new set of opportunities for legitimate business expenses including cell phones, cars, travel, work conferences, and even family members on payroll. Sellers argue that these expenses could be removed to double or triple profit margins.
Naturally, buyers are cautious to accept those assumptions because they don’t know what’s truly necessary. Sure, there are different types of work conferences, but you can’t simply stop learning since you bought a new business. The same applies for maintenance expenses stopped in the final year of operations.
Buyers will typically want to see three years of your financials. Buyers are looking for significant reductions in costs, as this EBITDA boosting strategy can lead to deferred costs and erode trust in the sale process.
Buyers will take comfort in seeing consistency and growth in your financial statements. This is why it’s important to begin cleaning up your expenses three years before selling.
If you’re going to reduce your business deductions to only mandatory and continuing expenses, how can we keep your tax liability low? Consider increasing the retirement plan funding options to keep taxes low.
Employers using a SIMPLE or 401(k) should look at one or both of the following:
1. Safe harbor 401(k) – By making safe harbor contributions, owners may be eligible to contribute up to $56,000 to their own 401(k). This component may require additional contributions to employees. However, because staffing is a major concern for most buyers, this should improve your staff retention after the sale. Also, your ability to save more for retirement is beneficial for both the staff’s and your own financial picture.
2. Cash balance plan – A cash balance plan places heavy consideration to the age and compensation of each employee. Because business owners considering a sale are typically heavily compensated and older than their employees, this means the business would need to contribute more to this business owner’s retirement account.
Combining the two plans may be especially effective because 401(k) contributions are considered for cash balance plan contributions. Strategic implementation of these plans can yield significant retirement benefits.
Remember, a safe harbor 401(k) and/or cash balance plan will help reduce business taxes as you begin to right size business expenses. The combination of these two efforts should maximize your long-term net worth.
Talk it Out
Most retirees enter retirement without knowing what they will do. This can lead to worries, frustration and a feeling of being “left behind.”
Because no one can accurately forecast your life in a decade, we like to encourage retiring entrepreneurs to focus on planning the first three years of retirement. What trips will you take? What home improvement projects should be completed? Will you buy a second house? Would you consult for your current business? What special considerations need to be made for your family?
Each of these questions is major on their own. The combination of questions is what leads to anxiety and paralysis through analysis.
Begin by working through each question. What’s the thing you’ve always talked about doing with your spouse? Plan it out and go do it!
Because you’re coming off an energy high from selling your business, it’s best to have items lined up within a few months of the business sale. This may be a special trip with your family, a housing project or charitable endeavor. Keep in mind any employment contracts that would restrict your time.
As you begin the sale process, planning is critical, and taking the time to work through each item can prevent headaches later down the road. In our next article, we’ll discuss the three items to complete three months before your business sale.
This report was prepared by Delta Wealth Advisors a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Neither the information nor any opinion expressed it so be construed as solicitation to buy or sell a security of personalized investment, tax, or legal advice. For more information please visit: https://adviserinfo.sec.gov/ and search for our firm name.
This is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report. Information in these materials are from sources Delta Wealth Advisors deems reliable, however we do not attest to their accuracy.