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 will ever make. For some entrepreneurs, the decision to exit a business will come as a sudden epiphany. For others, it will come after much soul-searching. Whether you are selling your first business or your fortieth, the process is long and complex, and likely requires more mental preparedness than you first imagined.
Previously, we discussed the five things you should know about selling your business. Here, we discuss what it takes to become mentally prepared to sell your business and some of the things you need to consider prior to putting up a for sale sign.
While the mechanics of selling a business can take months or even years of planning, there is no point beginning the process if you aren’t ready to make the leap. Indeed, one of the biggest obstacles that a business owner needs to overcome is their emotional attachment, says Simon Smales, a relationship manager at RBC Wealth Management in London, who specialises in managing and working with business owners and entrepreneurs throughout their lifecycle. Before the sales process can even begin, it is essential to be confident and comfortable that the right decision has been made.
Exiting a business isn’t necessarily about cashing out once and for all. While for many business owners the decision to sell means the culmination of a lifetime’s blood, sweat and tears, for others it might just be another in a series of exits. Indeed, Smales says the reasons for selling 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. They see their strengths in building businesses rather than in running mature ones,” Smales says. “Others wish to grow the business to the next level and this will usually involve selling some of their shareholding 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, also 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.”
Among the many questions that need to be answered when selling a business, the financial impact is an important consideration. Many business owners make the mistake of deciding to sell before considering how much they will need to fund their lifestyle post-exit. This can become problematic when the amount a business owner wants to earn from the sale differs from the amount they will actually need. Therefore, business owners need to ask whether a sale will generate enough wealth to provide for their own and their family’s future needs.
Dion Lindskog, Head of Wealth Structuring at RBC Wealth Management in London, says that this is when effective financial modelling comes into its own. “We have developed a modelling tool that can take into account the after-tax returns from a number of investment sources and the client’s income requirements to see whether or not their objectives can be achieved,” Lindskog says. “The tool is flexible enough to vary the investment returns and also the income requirements in the future. This allows our wealth structuring team to consider the appropriateness of the various solutions available.”
In all situations, effective lifetime planning will not only help determine exactly how much capital will be needed and whether this can be achieved solely through the proceeds of a sale, it can also help to enhance the value an entrepreneur can receive from their business. 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. Will you continue to work and invest in new businesses? Who do you need to provide for? What type of legacy do you wish to leave? Are you interested in growing the business? This will lead to whether you should exit, what format this will take and the value this strategy will add to your family and your business.”
Above all, it is essential to be mentally prepared to exit your business both in terms of letting go of the reins and also in reconciling the difference between what you think your business is worth and what it is actually worth. “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.
In many ways, selling your business marks the transition into a new phase of life. But what this transition entails depends on the type of sale and how it is structured. Therefore it is important to carefully think through your options in advance, Smales says. “If it is a trade sale or a sale to a private equity investor, there will often be an earn-out period where the seller is tied in for a few years to ensure a smooth handover and that the business continues to grow,” he says.
“If it is an outright sale, then the next step is usually a pause for breath. Often this is the first time they will have had so much liquidity, and it is often a good idea to put that hard-earned cash somewhere secure and take a holiday before deciding what to do next.”
Above all, if a liquidity event is on the horizon, Waller says the best thing for a business owner to do is seek the advice before it happens. “The ideal time to come for advice is actually before the liquidity event because there are some sensible steps clients can take up to 12 months prior to a sale to ensure they make the most of what is for many a one-off opportunity,” she says.
Aside from the obvious questions around how to invest their funds, Waller says that clients will often want to talk about how to preserve and grow their wealth, how to structure their affairs in order to meet their long-term financial goals, and how to plan the transfer of wealth to the next generation. “Business owners and entrepreneurs should think about the tax treatment of a proposed sale. Entrepreneur’s Relief is particularly important because it potentially reduces the Capital Gains Tax rate on a sale to 10 percent on up to £10 million per individual. We will work with the client, their family and their business, as well as their tax adviser, to help them consider how best to approach and structure their shareholding prior to the sale and manage their assets for the future,” Waller says.
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