For many, selling all or part of a business is one of the biggest decisions of their career. Sound planning plays a fundamental role in most business successes but after years, or even decades, of effort and dedication in getting to the point of an exit, unfortunately it is far too common for owners to be underprepared for a sale. Over half of business owners have not put a formal exit strategy in place, according to UBS[1].
This can lead to less desirable outcomes for owners, such as selling the businesses in a manner that does not fully compensate them for their achievements or exiting at a later point in time than they expect. By breaking down the selling process into three parts – pre-sale, the sale itself and post-sale – this gives owners the best chance of getting what they want from the time, courage and attention they have put into making the business a success.
[1] The ultimate guide to selling your business | UBS Global
Pre-sale
Sale preparations can begin years in advance of the event and, although circumstances will almost certainly change, starting to consider an exit early is a wise move that helps increase the chances of reaping the rewards further down the line. Business owners tend to be so focused on the running and growing of the business that they can neglect longer-term personal plans.
No two entrepreneurs are alike, so key considerations and plans will depend largely on what matters most to each individual. This can be a difficult process, and a good starting point is simply identifying what’s personally important to the owner by answering the following questions:
- What would you like to accomplish?
- Who matters most to you?
- What legacy would you like to leave?
The answers require careful consideration and may change in time but giving them some thought can help to frame decisions in the present, as well as going forward. Popular routes for those looking to wind down after selling a business include retirement, travel and spending more time with family. Those looking to carry on working may consider starting another business or working as an employee for another company.
Sale
Selling a business is a complex process and one of the first key steps is calculating how much is enough - the vast majority of business owners have a minimum price at which they would sell. Three central factors can help inform this decision:
- Liquidity – The resources required to fund your desired lifestyle. Consider - other sources of income? increased/decreased spending going forward? Have you got a cash buffer for unforeseen developments?
- Longevity – The length of expected life after selling the business – Quite different for a 40-year old than a 70-year old.
- Legacy – What you would like to leave behind? This can mean quite different things for different people.
Answers can vary depending on the aims identified in the pre-sale phase. This differs depending on the owner’s plans going forward – retirement and travel require higher proceeds than if going into employment for another company.
Although these calculations can be quite technical – essentially determining the net present value of future family spending – the results can provide a huge amount of clarity not possible without completing the exercise. While it may show a shortfall between the attainable sale value and the desired amount, it can also do the opposite, allowing owners to realise they are able to sell sooner than they expected.
Post-sale
Planning for after the sale of the business can help stand an owner in good stead going forward. In effect, an individual or family becomes a long-term asset manager with the proceeds of the sale – a proposition that can be daunting as well as exciting.
Given that many informed business owners will only sell at an attractive price that satisfies their pre-sale goals and aspirations, there is not always a pressing urge to invest the assets. However, while the proceeds could likely be held in cash and suffice to fund the owner’s lifestyle for the rest of their days, it will rarely allow for supporting multiple generations. High inflation can also take a significant chunk of the real value.
There are many tales of wealth being depleted over time (three generations of wealth, etc) due to excessive spending, an inflexible approach to budgeting and poorly selected investments. A diversified, multi-asset portfolio, tailored around an individual’s specific needs offers one of the best approaches to avoid befalling this fate.
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