Council Post: Questions To Ask Yourself Before Selling Your Business

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Bill Keen is the Founder and CEO of Keen Wealth Advisors and the Best-Selling Author of Keen on Retirement.

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If you own a profitable business, one of the questions you’ll have to answer is what to do with your free cash flow. Many of the business owners I work with invest this excess capital back into their business because that’s the investment avenue they know the best. In a good portion of the cases, their hope is to one day liquidate the business and live off that pool of capital for the rest of their lives.

Preparing for a liquidity event involves more than just growing your business. You must ask yourself important questions to make sure your plan aligns with your preferred lifestyle and that the reality doesn’t fall short of both. We’ll unpack some of those questions in this article.

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Determining The Sales Price

If you’re going to sell your business, you first need to make sure you have the right price in mind—and determining the right price begins with looking at your annual income needs.

Let’s say you’re currently living off $500,000 a year of income. Using William Bengen’s 4% rule as a rule of thumb, we can estimate that you’ll need to clear $12.5 million after taxes from selling your business to maintain your current lifestyle for 30 years. When I do the math with my clients who are business owners, many of them respond with, “I’ll just keep my business.”

They usually say this for a couple of reasons. The first is that they currently wouldn’t be able to sell their business and clear that sort of post-tax profit. They aren’t being offered the multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) they’d need to make the math work and keep their lifestyle going.

The other reason is they’re making good money off their business—far more than they’d be locked into if they sold and had to live off the proceeds the rest of their lives—and so it makes more sense to hold the business than sell, even if they’re offered 10 times EBITDA (or more) to do so.

Financial Factors To Consider

There were a couple of assumptions embedded in the logic above. The first is that you need to maintain your current lifestyle. This might not be true in your situation. You might have expenses (such as caring for your aging parents or your children’s tuition) that won’t be expenses for the rest of your life. Or you might be planning to up your expenses in retirement by traveling the world with your family, buying vacation homes or taking up an expensive hobby.

So therein lies an important question: What kind of lifestyle do you want once you’ve sold your business? And once you nail that down, how much will that lifestyle cost you per year?

Another assumption is that your pool of capital needs to last 30 years. You might be looking to sell later in your life and planning for your money to last 15 or 20 years, so the 4% rule doesn’t apply. Or you might want to retire at age 45 and need more than 30 years of income.

The final assumption is that the money is just to fund your lifestyle. If you want to do that and leave a sizeable inheritance to your children or grandchildren, or perhaps start an endowment at your alma mater, you’ll need to plan for a higher sales price than you get using the 4% rule.

A Third Option

Some business owners hold onto their business not just for financial reasons but because they can’t imagine walking away. Tension exists when that desire to stay involved clashes with their desire (or their family’s desire) to spend more time away from work.

So, another question worth asking: Is there a third door I can choose besides holding or selling the business? I’ve seen many business owners hire a president or COO to run the business while they step back. Others become the chairperson but maintain majority ownership.

Choosing this option gives them the best of both worlds. They can devote more time to their life outside of work and they remain involved with the business they love. It’s mentally stimulating and there might be tangible perks—like health insurance or a company car—to go along with the tax benefits that come with owning a business. Those perks can be hard to give up.

Consider All The Factors

People sell businesses for many reasons. Some are ready to retire and enjoy the fruits of their labor. For some, the business is so demanding or stressful that it’s compromising their health and they need to step away. Others still have outside demands on their time that prohibit them from giving their business the attention it deserves. All these reasons are viable.

What matters is understanding why you want to sell your business—if, in fact, you do. After running the numbers, by yourself or with a financial advisor, you might determine you’re not financially prepared to liquidate the business. Or you might not be ready to step away.

A liquidity event is a big deal that requires thorough preparation both financially and emotionally. It can be hard stepping away from a business, especially one you started and grew. But by asking yourself the questions in this article, you can feel good about taking that step.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


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