If you’re a business owner from the middle-market end of the spectrum, selling your business will almost certainly be the largest earning event of your entire life. Even some business moguls in the higher rungs of the marketplace never make more than the day they sell their businesses.
Obviously, this means that you want to find the best way to sell a business and to leverage whatever opportunities you have at your disposal to make this earning event truly worthwhile. This is as big as it gets, and it’s your job to maximize the potential payday you’re getting.
How do you do that, though? There are countless ways to sell a business, and there are tons of factors to consider.
Today, we’ll go over the most notable ways to sell a business and a few things that everyone getting ready to sell should understand, and then we’ll give you a wrap-up to get you pointed in the right direction.
Let’s get started.
Why is it Important to Pick the Right Method for Selling Your Business?
We briefly mentioned above that the reason you want to sell your business a specific way is that you want to maximize how much you can make off it, but that is the simple answer. There are various other factors that you need to consider that are far more complex and personal than simply “get the biggest payday”.
Here, we’ll go over some of the factors that you need to consider and what you’re trying to maximize, minimize, or avoid, in which M&A advisors can help.
1: Tax Minimization
Minimizing the amount of tax you’ll have to pay on the sale is absolutely crucial. This isn’t one you can “avoid”, either. If you do that, you can expect legal issues in the future.
However, different selling methods do offer various tax perks that take advantage of how tax laws are written. You can be one or two technical definitions away from saving tens of thousands of dollars in profit.
2: Honoring Commitments
Depending on how your company is set up, you can face some serious ramifications for just randomly selling your business to someone else. After all, you’ll have likely made commitments, partnerships, promises, and written agreements during your time running the company. Some of those are null and void when you decide to sell, and while you can do the best you can to ensure the new owner honors them, it’s really not your problem anymore. Besides the damage you’ll have done to your personal relationships, that is. However, some of those agreements and promises can quickly get you in hot water.
So, consider all of those agreements you made before you decided to sell, and make sure to figure out if you are obligated to honor them without compensating the other individual or entity.
3: Risk Mitigation
Some methods of sale can be risky. For example, there’s a method where you sell the business upfront for a relatively small sum, and then you’re paid according to the profits the company continues to make in regular payments. What if the new owner does a horrible job, and they never get the full amount owed to you? What if they’re forced to close just a few months after taking over due to catastrophic decisions? Sure, you can take them to court, but that takes more money, and you’re still not guaranteed to ever see what you’re fully owed.
That specific method will be talked about later. It’s not as horrible as it sounds. However, whatever choice you make, you need to make sure you’re mitigating your own risks. This is the biggest earning event of your life. You want to treat it a lot like a newborn and truly try to protect it.
4: Maximize Long-Term Survival of Assets
One thing a lot of business owners mess up on is they don’t have plans for the long term. Yes, you’re a mature adult with years of business experience, and you know your way around money when it comes to that. However, suddenly having 10 million dollars available at once can ruin even the most frugal person’s idea of how to properly spend their funds. That’s not even accounting for your lifespan. Let’s say you sell a company at 50 for early retirement. You might be ready for 10 years, but can you make the right moves to stretch it until you reach the age of 90? What about 100? Will it last you an entire other lifetime?
Typically, this is something you want to handle in the post-sale process. You want to reinvest a good portion of your money to keep building value until you actually need it.
However, some selling methods “trickle” money into your account instead of providing it all upfront in a way that encourages reckless behavior. You want to consider this because you’re not getting another job or opening another business as an 80-year-old who just ran out of cash.
The Types of Business Sales
There are several ways to sell a business, and honestly, they all have their own merits.
In this section, we want to go over all of the most practical methods and cover the pros and cons that they offer.
Passing the Business onto Trusted Individuals:
This is a method that is usually used by family-owned businesses or businesses that have significant personal value to their owners. This is when you designate a trustworthy family member, top employee, or similar individual to take over the business and buy it from you.
Now, you might be scratching your head with this one a bit. How is the guy you were just paying $15 per hour going to buy your entire business? Well, they don’t. At least, they don’t buy it upfront.
Instead, you issue a seller note that essentially works as a type of financing. We mentioned this earlier as a negative example, but this is where the method truly shines; using it to keep your business in the hands of a trusted individual you want to keep your legacy going forward.
For a lot of people in the small business realm, this is a great option. It’s even relevant to those in the middle-market area, but it tends to fall behind a bit the larger the business is. Once a business is huge, you’re typically either handing it down as an inheritance, or you’re selling it to someone who can afford it.
Now, the whole point of selling this way is to make sure your family or trusted friends are taken care of while preserving your hard work. A big investor could easily gut the place and turn it into something entirely different, but someone with an emotional attachment is more likely to preserve it. With that being said, you probably won’t be getting all of the funds upfront. You’ll be receiving payments based on the future profits of the company. Every seller note is different, but you might get monthly checks, or you might get quarterly checks. If the note is percentage based, there’s room for a lot of variation in your payments.
The problem with that is that the business might not do as well as you hope with a change in ownership. Now, there are ways to ensure you have recourse to gain your lost funds, but we are talking about people you’re close to. If you’ve ever sued a family member, you know how that can end up.
This is why we don’t necessarily recommend this option unless the business is in a good place, and you really care about keeping your legacy going.
2: Using Business Brokers
One of the most straightforward methods of selling a business is to contact a business broker and let them handle the sale. There are some pros and cons to this.
First, a business broker is a person who is trying to get a commission for selling your business. So, naturally, they want to make sure you get as much money as possible. That’s how they maximize their own payday. There is also the factor of not having to deal with as much complicated nonsense. You just spent decades learning to operate a business in the most effective way possible and adapting to change. You most likely didn’t prepare yourself for selling it and understanding all the fine details of that process. A business broker deals with that every day.
However, there are some major downsides you must consider.
First, and most obviously, the broker takes a cut. It’s like selling real estate. Yes, your average home is worth $150,000 in the Midwest region, and that’s great for the average homeowner, but when it’s sold using a real estate agency, you have to pay that agency a pretty hefty sum. In fact, in the real estate example, you can pay as much as $30,000 for the $150,000 sale to the real estate agent. That really curbs your enthusiasm in that scenario, right?
Besides having to pay a fee for a broker to handle the deal, you also have to trust the broker to do what’s best. This essentially boils down to you letting someone who supposedly has more experience than you decide the future of your life’s work.
This isn’t a bad idea. If you don’t have any clue what to do to maximize your profit while minimizing headaches, this is a great idea. You’ll immediately understand what the strengths of this method are.
3: Appeal to Investors and Larger Businesses
Finally, your primary option is to appeal to those with more than enough money to purchase your company outright. Mostly, this will mean appealing to other business owners or investors who can pay for the company outright. This is the easiest way to get a major paycheck, but most of the time, you’re going to be leaving your legacy up in the air.
This is mostly because of the range of decisions that the buyer makes. They might keep your company’s name, but they might make it something entirely different than what you imagined. That’s simply the cost of using any method that relies on another company buying it.
You also have to worry about marketing the business and handling the sale on your own. However, you can cut that work in half by hiring qualified lawyers to handle the sale negotiations for you. That is always recommended regardless of the selling method you use, but it’s especially necessary when you’re selling the business yourself and having to negotiate with other companies.
You can gain the attention of larger entities in numerous ways. You can simply let it be known that you’re looking to sell, get in contact with competitors that might want to buy your brand to absorb it, or otherwise get you out of the way, etc.
Details to Consider
Finally, let’s go over some details you need to consider. These are relevant to all of the methods we gave above.
1: Splitting Up Assets
First, the way you sell each of your company’s assets is important. If you bundle it all in with your business, you get an extremely simple selling process that gets cash in your pocket as soon as possible. However, you’ll pay more in taxes, because you just got a massive lump sum.
Otherwise, you can sell your assets individually to lower your tax liability in some cases. There is also the option to sell your company stock after discussing it with investors, but that’s only if you’re a publicly traded company.
2: Be Prepared Beforehand
Another key tip is to make sure you’re prepared to sell long before you actually sell. The more you can raise your company’s value before a sale the better, and mentally, you’ll be in a much better place if you know what to expect.
What’s the Best Way to Sell a Business?
So, we’ve generalized the idea of selling into three categories for the purpose of this article, but which one is actually the best? Well, that really depends.
These three methods are the most likely ways you’ll try to sell your business, but they aren’t all ideal for many companies, and some are very bad ideas for certain companies.
Selling a business is a complex, highly evolved process, for which you need someone with specialized skills, knowledge, good judgment and experience. That’s why it’s highly useful to contact M&A advisors.
Your first choice is Final Ascent. Our team can assess your business and help you create a custom-tailored plan to sell your middle-market business the right way. Contact us today to get started!