Regardless of your exit strategy, they all have pros and cons. However, the most effective exit plans have contingencies for all of these plans. A well thought out exit plan is critical to a successful transition. That’s why I wanted to take a look at some of the common blind spots owners encounter when selling their businesses on the open market.
Even if you’re not currently considering selling, at some point you’ll exit your business. There will come a day when you will no longer be able to fulfill your ownership responsibilities. Whether by personal choice or through disability or death, the reality is that you will one day leave your company.
Therefore, the sooner you start planning your exit, the better. This is especially true when you consider that finding the right buyer is often a long and difficult process. You see, in any given year there are thousands of businesses for sale with a relatively limited pool of buyers.The ratio of businesses to potential buyers in the market is part of the reason why only about 20% to 30% of businesses are able to sell (opens in a new tab).
subscription Kipling’s Personal Finance
Be a smarter, more informed investor.
Save up to 74%
Sign up for Kiplinger’s free e-newsletter
Profit and prosper with Kiplinger’s best expert advice on investing, taxes, retirement, personal finance and more – delivered directly to your email.
Profit and prosper with Kiplinger’s best expert advice – delivered straight to your email.
Likewise, the sheer number of businesses available makes it difficult for buyers to find the right one.In fact, a recent survey by BizBuySell.com (opens in a new tab) revealed that 58% of buyers consider finding the right fit to be the most challenging aspect of the buying process. So, taking early action to prepare your business for sale can make it more attractive to potential buyers, improving your chances of a deal.
Uncover blind spots in exit planning
Selling to buyers in the open market offers unique advantages to sellers. But potential blind spots mean you must have an exit plan that considers all potential outcomes. Of course, this is hard to do because, essentially, blind spots are unknown to you.That’s why partnering with a Certified Exit Program Advisor (CEPA) (opens in a new tab) Or business coaching is very helpful.
Using your CEPA can help you uncover some of the loopholes in your exit plan, making you and your business better prepared to sell on the open market. If you go through your personalized exit plan, they provide valuable insights from their own experience. But more than that, a CEPA or business coach can look at things objectively. This is invaluable to small business owners who often suffer from proximity blindness.
When you work so closely with something, as business owners do in their businesses, it can be hard to see it for what it really is. This is especially true after years of blood, sweat and tears have been poured into a business.Entrepreneurs develop a similar attachment to their businesses, research shows (opens in a new tab) For parents and their children. Since no parent thinks their child is ugly, few business owners see all the problems with their business. So having an objective eye can really help you with your exit plan.
Obviously, planning for your exit is necessary, and it is important to have someone who can work with you objectively throughout the process. But what are the benefits of selling your company on the open market? Perhaps more importantly, what potential blind spots do entrepreneurs face in choosing such exits?
financial aspect
Of all exit paths, third-party sales typically have the highest potential payment cap. This is especially true if the buyer is making a strategic purchase. Unlike a sale to a family member or key employee, you typically receive most of the purchase price at closing rather than within a few years. This combination of having a higher sales price ceiling and a one-time payment makes this exit method very attractive to business owners.
However, this benefit is not without danger. Usually, there will be some stipulations in the purchase agreement. These can be in the form of revenue, callbacks, retention rates, etc. The problem is that you may not receive the full purchase price at closing. The balance can be significantly reduced through these provisions.
For example, if you get an offer of $10 million for your business and get 50% at closing, the remaining $5 million depends on how the company performs during the clawback period. Therefore, you cannot expect to receive the full purchase price. This is a blind spot that many business owners overlook. CEPA can help you prepare for this possibility before you enter the close.
Timing issues can creep up on you
Selling a business takes time. Although selling to an open market buyer is usually one of the quicker ways to do a transaction, it still takes time. This opens you up to another potential blind spot. You’ve spent years preparing your business for this moment. However, it is this very moment that may cost you. let me explain.
When you start trading, your focus shifts from your business to trading. Something went wrong because you were no longer focused on your business. Maybe it’s an internal system that you’re not locked down like you think. But as long as you give your full attention to the business, it will work. No matter what it is, when you put all your time and energy into closing a deal, something will happen.
The buyer will see this as a risk and will usually try to renegotiate. Now, you are stuck. At this point, you’ve probably spent hundreds of hours making the sale, and you’re emotionally invested. Do you walk away from the deal, or acknowledge and accept the new terms? You certainly don’t want to be against yourself. Again, time investment is something a coach can help you with.
Reduce your tax burden
One of the only certain things in life is that you will pay your taxes. This is especially true when selling a business. Regardless of your business structure, you will face tax landmines specific to your entity.For example, if you start your business as a C Corporation (opens in a new tab) and never converted it to an S corp (opens in a new tab)you may be taxed twice (once at the company level and once at the individual level) based on the final sale price.
This is where you need to really lean on your advisor. Determine your exit path and take the necessary steps to reduce the tax burden of pre-market sales. Avoid this costly blind spot by maintaining close communication with your tax planner or advisor.
While there are countless potential pitfalls when exiting a business, working closely with a CEPA or business coach can ultimately save you a lot of trouble.
This article was written and expressed the opinion of our staff of consultants, not the Kiplinger editorial staff.You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).