Though selling a business is rarely a cakewalk, the right preparation can help you make the most of your hard work.
A booming bakery, a recovering market and a well-baked plan: That was one couple’s recipe for successfully selling their business in 2017.
Founded during the 2008 recession, the bakery was a fallback plan for real estate industry professionals Daniel and Jenny Ramirez. In 2017, they knew the timing was right to return to their real estate careers, they told Forbes. So they made a plan, hired a broker to price the business, and did their homework. To their delight it quickly sold, leaving Daniel with enough money from the sale to earn a master’s degree to boost his earnings potential.
It’s an excellent example of how a thoughtfully planned exit strategy can help kick-start the next stage of life – and of the importance of timing.
Businesses Set to Change Hands
Experts say it’s a seller’s market for those looking to cash out. Small-business sales saw a big jump in 2017, with a record 9,919 small businesses sold, up from 7,842 in 2016, according to BizBuySell, a business-for-sale marketplace. Asking prices jumped 11% in 2017 to a median of $250,000, with associated sale prices rising 14% to $227,880. At time of publication, 2018 was set to surpass that high water mark, with 5,383 businesses sold in the first two quarters of 2018.
These conditions have many entrepreneurs thinking of selling – and on top of that, retiring baby boomer owners are bringing even more businesses to market. Nearly 60% of baby boomer owners surveyed by BizBuySell plan to sell their business within the next two years.
Adding to this trend is the Tax Cuts and Jobs Act passed in 2017. It created a 20% deduction for qualified business income for small-business owners (general guidelines say single owners with a taxable income below $157,500 and married owners with taxable income below $315,000 qualify). Many owners plan to invest those potential tax savings into priming their businesses to sell.
Asking the Right Questions
Whether you’re looking to retire or just ready for your next venture, it’s important to define what you want to get out of the sale of your business and make a plan. To start with, how much money is enough? Once you have a clearer idea of the amount you’d like to make from the sale of your business, net of expenses and taxes, it might be time to see how that lines up with what a broker says is a fair price for your firm. Your advisor may be able to help you coordinate with a valuation expert. If there’s a gap, you’ll want to increase the cash flow and value of your business before trying to sell it.
The next big question is about timing. When do you prefer to exit or take a more passive role? In order to answer this, you’ll want to know the broad brushstrokes of your next stage of life. If that phase is retirement, you should start defining what it is you’ll spend your time on, whether it be travel, hobbies or spending more time with family. You’ll also want to consult with a professional advisor to ensure you have enough income to maintain your desired quality of life and optimize your strategy for claiming Social Security. If you’re going to jump right back in to another business or line of work, you’ll want to make sure you have a firm foundation and strong network to make the next venture a success.
Finally, you must determine who your ideal buyer is. Businesses valued at less than $500,000 are most likely to sell to a first-time buyer (50%), serial entrepreneurs (36%) or existing companies (13%), according to 2018 International Business Brokers Association data. You might have a family-owned business that you’d like to sell or transfer to a family member, which may affect your timing so you can prepare them for the responsibility. Keep in mind that such a transition will likely take more planning and preparation than a sale to an outsider. You can also sell it to your employees using an employee stock ownership plan. These are just a few of the many options to consider with your advisor well ahead of time. You don’t want to make major decisions under a pressing deadline if you don’t have to.
The Secret Is in the Prep Work
For a smooth exit, you’ll be far ahead of the competition if you take time to prepare. Nearly 67% of sellers did not do any in-depth planning before putting a business on the market and nearly a quarter of them did less than a year of planning, according to a 2018 Market Pulse Survey produced in part by the International Business Brokers Association.
After doing some soul searching about your vision for the future, turn to your advisor for specialized guidance for this important next step in life. Your advisor can tap into the expertise of a network of specialists to help formulate a strategy to optimize the sale, giving you confidence in handing over the reins.
Sources: Forbes, BuyBizSell.com, International Business Brokers Association
Raymond James and Raymond James financial advisors do not provide tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Raymond James is not affiliated with BizBuySell.