Exiting a business isn’t merely about putting up a “for sale” sign. It requires careful mental and financial planning.
Selling a business is one of the biggest decisions a business owner or entrepreneur will ever make. Whether it’s your first sale – or your fortieth – the process can be long and complex, and will likely require more mental and emotional preparation than you first imagined.
Exiting a business isn’t necessarily about cashing out once and for all. While the decision to sell means the culmination of a lifetime’s work, the reasons for selling can span a broad range of possibilities.
“For some it’s retirement. Others are serial entrepreneurs and will be looking to start another business and repeat the trick,” says Simon Smales, a relationship manager at RBC Wealth Management in London. “Others wish to grow the business to the next level and this will usually involve selling some of their shareholdings to a private equity firm or listing on the stock exchange to help fund that growth.”
Once you’ve made the decision to sell, the next hurdle is coming to terms with handing over the reins. For many, this is the biggest challenge to overcome. Katherine Waller, a relationship manager at RBC Wealth Management in London, says this is due to the emotion and hard work that goes into building a successful business, as well as the personal and financial risks taken to build it.
“Many business owners and entrepreneurs can find it challenging when negotiating an exit strategy, even if they plan to continue working with the new management team,” Waller says. “Such an exit can lead to exciting new ventures and a change in their financial profile. But this can also create new and unexpected burdens including the struggle to relinquish control of something that is so important to them.”
Another factor to consider is whether you’ll sell the entire business or just a part of it and continue to be involved going forward. To that end, it’s important to consider the following:
The answers to these questions will help you decide whether you should exit, what format this will take and the value this strategy will add to your family and your business.
While making a partial sale is attractive for business owners who want to maintain ties with the company, there are circumstances when a complete sale is in fact the best course of action, says David Tosh, a relationship manager at RBC Wealth Management in London.
“More often than not it seems to make more sense to sell the entire business rather than seek a partial sale or an investment partner. Some businesses are victims of their own success and outgrow their capital and cash flow,” Tosh says.
“Some of our clients have decided that an outright sale benefits everyone because it allows them to secure their financial future while also ensuring the future of the business under the stewardship of a new owner. Entrepreneurs are typically headstrong and it often doesn’t sit easily for them to be directed by new co-owners on what was their business creation.”
The financial impact of selling your business is an important consideration. Don’t make the mistake of deciding to sell before considering how much you’ll need to fund your lifestyle post-exit. This can become problematic when what you want to earn from the sale differs from the amount you actually need.
This is where financial modelling that wealth managers use can come in hand. The modelling tools can take into account the after-tax returns from investment sources and income requirements to see whether or not a clients objectives can be achieved.
Effective personal wealth planning will help determine exactly how much capital will be needed and whether this can be achieved solely through the proceeds of a sale. This is just one reason why it’s important to consider an exit long before the event is likely to happen.
“All too often the decision on how and when to exit the business may be focused on a personal need or on the growth and value the owner can continue adding to the business,” Waller says. “Instead, you should consider both what you need and how you can continue to grow the business to its greatest capacity ahead of an exit.”
No matter which direction you take, it’s essential to be mentally prepared for all scenarios.
“If you’re not ready to sell your business, it doesn’t matter how much you can get if the psychology isn’t there,” Smales says.
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