Warning…there are many blind spots lurking beneath the surface that might impede a seamless sales process for you.
And here at Consolidated Planning, we want to help you to address those blind spots head on. Over our decades-long journey, our advisors have helped countless small business owners build business value and retire the way they want to.
As you begin to contemplate the sale of your business, meticulous planning and foresight is necessary to avoid common business mistakes. In this article, we’ll delve into the three factors that can affect the sale of your business, what value drivers you need to pay attention to and how addressing these blind spots help you build value for the ultimate sale of your business.
Top 2 Considerations That Can Affect The Sale Of Your Business
#1 Informing (Or Not Informing) Your Employees
As a business owner, it might be your initial reaction to either want to tell your employees about the sale of the business or feel that you need to. That is simply not the case. This kind of information is something that can’t be put back in a box.
And choosing to NOT inform your employees of these business matters actually helps the overall sale of your business in a few ways:
- Maintaining productivity
- Preserving relationships
- Protecting confidential information
- Avoiding departures
- Optimizing negotiation position
- Minimizing disruptions to the business
Minimizing overall disruptions to your business during this transaction is essential to the seamless and successful sale.
#2 Your Business Value and Value Drivers
Typically, when businesses are sold the price is agreed to first and then the terms. So even if the price is all well and good, you might not be keen on the terms.
It’s one thing to get the proper value for your business but it’s another thing to get as much as you can upfront.
One example of terms of a sale might be earnouts. An earnout means that the seller (you) must “earn” part of the purchase price based on the performance of the business following the acquisition. This structure might include varying targets and/or durations of time, or anything else mutually decided on. In other words, you won’t be getting as much money as possible up front.
This is why your value drivers really matter. Businesses with shaky value drivers often have higher earnouts – less money up front.
You want the most cash possible up front, don’t you? Here are the value drivers that can help get you there…
What Are Your Value Drivers?
These four aspects are areas you want to focus on to drive your business value and help you avoid a high earnout.
#1 Your Key People
We’ve said it before and we’ll say it again, your key employees bring much more value to your business than you probably even realize.
It’s not enough to just retain your key people with the right retention and incentives plans but you must retain them well past the sale of your business. Ideally this looks like a retention plan that goes two years past the sale of your business. This further instills confidence in your buyer and yes, a higher value for your business.
In most cases, if there IS a retention plan in place, it only accounts for retention up until the change of control. That’s a mistake for your value.
#2 Proper Diversification In Revenue Streams
Think about your revenue streams. Is your client base a certain kind of business? A certain kind of industry? Or is it a handful of large organizations? Having proper diversification in those revenue streams means you have many clients in many industries.
This diversification mitigates your earn out because the risk is mitigated.
#3 EBITDA
Your earnings before interest, taxes, depreciation, and amortization (EBITDA) is a measure of your business’ profitability. It’s ideal for your business to be growing its profits WITH a customer base that is becoming more diverse.
Growing, or at least steady, profits mitigates additional risk when preparing for the sale of your business. And mitigating perceived risks to your potential buyer is the name of the game.
#4 Economic Environment
Timing is everything for the sale of your business. A time where the macro economic impact for taxes, rates, and recessionary forces are PERCEIVED as tailwinds for your buyer.
Tail winds are always better than headwinds for your buyer. This takes into account:
- Recessionary impacts
- Interest rates
- Tax matters
These are all factors that impact every single sale and the perceived value for your buyer.
#3 Your Personal Planning Must Align With Your Business Planning
Your personal balance sheet matters, regardless if you’re preparing to sell your business or not. With such a focus on your largest asset, it can be hard to remember that your personal planning should align with your business planning. They are one in the same. And if you’re preparing to sell your business, your personal planning must be accounted for to know what is ideal for your exit from the business.
If you take all that you have on your personal balance sheet plus the proceeds from a potential sale, after taxes, will that be enough to retire the way you want?
Sometimes, business owners sell their business just to realize they lost more than they expected to from the fees, transaction, and associated taxes.
Don’t let that be you.
It’s also possible that when you evaluate how your personal planning aligns with your business planning (or not), it might not fiscally make sense to sell your business. Your business at this stage might be worth more with you owning it than you selling it.
This is why planning WELL AHEAD of the sale is essential for your post-sale requirements.
Address The Blind Spots That Might Diminish Your Business Value
Gone are the days where you don’t know the value of your business until you receive an offer. The valuation of your business should be done annually to best equip yourself for the eventual sale of your business.
Once you know the value of your business, you can begin maximizing your business value through these value drivers. And establishing these value drivers to produce results will take time.
To understand how long it will take to sell your business, talk with an experienced business planning advisor at Consolidated Planning.
2024-167384 Exp. 1/2026
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Andy Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
