While selling your business isn’t a walk in the park, it is far less daunting when you begin the process and see what’s possible.
Here at Consolidated Planning, our experienced business planning professionals have helped countless business owners realize the full value of their life’s work. And the same can be said for your business too.
But how will you get there? In this article, we’ll help you navigate what a sale may look like in 12 months or five to ten years, why a business valuation is always your first step, and how to know if you’re actually ready to sell your business.
A Business Valuation Is The First Step Regardless Of Your Timeframe To Sell
Before even talking to a potential buyer, or considering your options for selling, you want to be armed with the knowledge of what your business appears to be worth to a third party. It’s far too easy as a business owner to overestimate or even underestimate the worth of your business and both of those scenarios lead to doing a huge disservice to your life’s work.
That’s because your business value isn’t made up of just one thing, but rather several components, including:
- Financial statements
- Cash flow
- Market analysis
- Comparables and benchmarking, and
- Earnings multiplier
Knowing the true value of your business allows you to potentially move forward with a sale sooner than you had hoped, 12 months for example, or realizing that you simply need a higher value to make selling your business worth it, say 5 to 10 years, for example.
Selling Your Business In 12 Months vs. Selling Your Business In 5 to 10 Years
Now, once your valuation helps inform the desirable timeframe for your sale, you can begin to better understand what comes next.
12 Month Sale
Selling your business in 12 months time means that your business valuation was likely higher than you expected. Cheers! Now, while anyone can certainly sell their business in 12 months, it might just cost you something.
Based on the appraisal of your business, you can begin to model out the sale. Some questions here might include:
- What is the tax going to be on this price?
- What will be leftover after applicable taxes?
- How does this dollar amount translate into income?
Oftentimes, business owners are just focused on the big number, not the cash flow. Realizing the cash flow derived from the sale price matters. In fact, the realized cash flow can make business owners step back and decide to not move forward with the sale OR rethink entirely how they were going to spend that money.
Selling your business in just 12 months leaves no time to impact or adjust your value or derived cash flow in the slightest.
5 To 10 Year Sale
Choosing to sell your business in 5 to 10 years doesn’t necessarily mean your business valuation was low, but maybe it’s not quite where you want it to be. It’s possible at this point it’s still worth a bit more with you running the business rather than selling it. For now, at least.
If you’re beginning with the end in mind, you can backfill what it will take to achieve your desired retirement or business sale. There are two things to consider with your 5 to 10 year sale time frame:
#1 Adequate Time To Adjust
Selling your business in 5 to 10 years gives you TIME. Time to adjust and substantially impact the sale price. During this additional time, you can work to maximize your business value to ensure you’re mitigating as much risk as possible to your potential buyer AND positioning yourself for adequate post-sale cash flow. Maximizing your business value might include:
- Making yourself inconsequential: getting out of the day to day and creating a turnkey business for your buyer
- Retaining your key employees: offering a retention strategy ($) to ensure your employees stay through the transition
- Demonstrating cash flow: demonstrating three years of maximum income by cleaning up your books or accounting for expenses differently
When you begin working on these factors to maximize your value, you will likely find that even three years allows you the necessary time to impact your sale. Leaving you to sell your business in less time than originally expected.
#2 Determine What Can Go Wrong
Now, with that said, 5 to 10 years also leaves more TIME for things to go wrong, including:
- Economic factors in your industry
- Departure of key employees
- Death, dispute or disability for the owner or partner
Because of this, completing a risk management exercise is often helpful to pinpoint the factors that could derail you, the business sale, and ultimately your long term success and happiness after life as a business owner.
How Do You Know If You’re Ready To Sell Your Business?
As a business owner, you likely worry, delay, and defer when it comes to exploring the sale of your business. BUT, with the right exercises and guidance, most business owners find that they can sell much sooner than they had originally thought and often for more money.
The biggest question you need to answer is, “Can I afford to sell my business?” This answer requires you to go beyond just examining the big number and pulling 4% off of that for your post-sale income requirements. That 4% might not be enough. But could it be enough paired with your other assets or other streams of income?
To understand the ways you can create cash flow from your sale proceeds, talk with an experienced business planning professional at Consolidated Planning.
2024-170044 Exp. 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 Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
