Are you ready to sell? How to transfer your business outside of the family

Many business owners hope to hand over the management and ownership of an entity they’ve worked hard to build to the next generation and see their children carry on their legacy. However, children aren’t always interested in, or able to, take over the company reigns.

If transferring the business to the next generation isn’t an option, owners of successful companies have two main choices: selling the business or taking it public, and possibly maintaining an ownership stake as a shareholder.

While business owners are interested in fetching the best price for their company, many are also interested in selling to the best person (or people) who can carry on their legacy.

“It’s often a very strategic sale, where the original owner feels that his or her company is being taken care of,” says Shaun Lim, executive director, team head for Greater China at RBC Wealth Management in Asia. “They want to ensure it’s sold for the right reason and to the right person.”

Selling a business includes several steps, including preparing the business for sale, valuing the company and having a personal plan for what to do next. The entire process can be very emotional for a business owner.

“It’s not just a question in the head, but a question in the heart,” says Lim. “How does someone give up the business he or she has started and worked so hard over the past 30 or 40 years to build? It can be a very difficult process.”

Businesses don’t always run smoothly, but selling a business can be relatively seamless with the right preparation and planning. This includes everything from valuing the business and preparing employees and financial partners, to figuring out how to structure your retirement or next career move when you don’t have an operation to oversee.

Financial advisors can help owners prepare for valuing and selling their business, and ensure they have a wealth management plan to set them up for what comes next in their personal lives. It may be travelling and spending more time with family, donating and working with charitable causes, becoming an angel investor and advising other entrepreneurs, or it might even be starting another company.

No matter what comes next, having a plan makes the transition easier and may help manage some of the emotions of moving on from a company you grew and nurtured for so long. “We understand the issues and the potential pitfalls,” Lim says.

1. Preparing the business (and yourself) for a sale

Whether you’re selling to a third party, taking your business public, or even winding down the business, the better prepared you are–both professionally and personally–the easier the process may be.

“Most people find it very stressful,” to sell a business, says Sarah Tang, vice chair, Enterprise Strategic Client Group at Royal Bank of Canada in Toronto. “But an advisor has been through the process many times with other buyers and sellers and can steer you in the right direction.”

A financial advisor, alongside a lawyer and an accountant, can help business owners prepare their company for a future sale, ensuring it’s in good shape to get the highest price possible. Business owners need help creating a plan to manage the expectations of all stakeholders in a sale. Making a plan is also a great way to outline expectations around the timing of the transition and what happens next.

To help ensure a business is in the best shape possible to sell, owners often start planning at least a year ahead, if possible, and forecast expected net profit over the coming year. This is one way to determine how healthy your business is. Having this information means you can take steps to improve it, if necessary, making the business potentially more attractive to buyers down the road.

Business owners can also improve their working capital position by selling under-used equipment and assets. Efficient stock management and tighter credit control will also improve working capital, experts say.

Another recommendation ahead of a sale is to focus on improving customer experience, which may help prove to the buyer they’re purchasing a strong brand. Good customer experience may also help to build goodwill, which can be key during the valuation process.

2. Valuing the business

“It comes down to dollars and cents,” says Lim. Unlike selling or transferring a business to a family member, where there are potentially more qualitative factors in play, valuation of a business comes down to what someone is prepared to pay for it and what the business owner is willing to sell it for.

When selling a business, owners may also be considering how the proceeds of the sale may be used to fund their future retirement, as well as the wealth they may plan to transfer to the next generation.

“If the sale is to a third party, it’s usually about the money,” says Lim; however, a seller may choose a lower offer price if they believe one particular buyer will run the business better, based on shared values. “It really depends on what the business owner wants, and what he or she is looking for in terms of legacy,” says Lim.

There are a few different ways to value businesses:

• Net assets valuation totals up the value of all the business’s assets – everything from property and equipment to accounts receivable and cash – and subtracts liabilities like debt. The result is the net asset value and the base sale price from an asset perspective.
• Net assets plus goodwill is similar to net assets valuation, but includes goodwill, which is an additional value based on an assumption of ongoing sales and profit. Goodwill takes into consideration a company’s brand and relationship with customers and suppliers, as well as intellectual property that may give a business a competitive advantage.
• Market value compares a business to others that have sold recently, often based on industry benchmarks. It’s like predicting the market value of a house when it’s put up for sale, which means the price may not only be determined by value, but also by demand. Most sellers try to sell when the demand for a business is higher; however, depending on the reasons for selling – such as an illness or financial challenges – this may not be possible. If an owner is selling due to illness or other pressing reasons, it may be even more important to have professionals value your business, to ensure it’s based on a fair market assessment.

To get the most out of a sale, regardless of the valuation method used, business owners should seek out a professional valuator with knowledge and experience in the owners’ specific industry. This can be a business broker, accountant or industry advisor.

“An advisor should be someone very close to his or her clients, who understands what they’re thinking about and what their concerns are, including their wealth transfer plans down the road,” says Lim.

3. Make a plan for your future

Once you’ve sold your business, and helped with the transition to the new owner, you may need a plan for yourself and what you’ll do next. While many business owners dream of travelling more, spending time on the golf course, on a boat or on the beach, entrepreneurs are accustomed to being busy and engaged in activities that drive them.

“It will be easier to let go of your business if you’re clear about what you’re going to do next,” says Tang. She recommends business owners plan the next stage of their life before they sell, taking into account their personal values and what matters most to them, such as lifestyle, home, family and health. These plans may change, but at least you have a roadmap from which to begin.

Too often, owners make the mistake of not planning for life after running a business, says Tang. It’s a particular problem if the business owner suddenly becomes ill, which could force them to make decisions in a hurry.

“It can be very taxing on the family to make a rushed decision, especially during times of distress,” Tang says. “The time to plan for an exit is when things are going well.”