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  • 2020
  • Thinking about selling your business?

Thinking about selling your business?

14 Oct 2020
  • Thinking about selling your business?

The Weekly Journal

Is it time to sell?  Should I retire? Should I keep trying? These are some of the questions businessowners can be asking themselves, especially in these difficult times because of the pandemic. But prior to thinking about selling the business, the appropriate question is…is my business ready to be sold? Before contemplating an exit strategy, there are several factors that should be considered and evaluated.

Reasons to sell

There can many reasons for wanting an exit from a business; acknowledging and understanding the reasons is the first step in this process. The reason one might have to want to sell could be many.  They could be personal (burnout, new opportunities, age, financial reasons, lifestyle changes, lack of succession), organizational (shareholder disputes, declining revenues), or inspired by market or industry changes (industry, economy or regulatory). These factors can influence the timing for the sale and expected return in the transaction. 

Considering the negative effect, the pandemic is having in several industries, the first decision is whether wait and continue putting resources and efforts into the business or sell now at the current valuation. 

Is the business ready sell?

What an investor looks for in a new opportunity is the revenue potential, expected cash inflows and high return in their investment.  These are the main drivers of value in a business and demonstrating a history of growth and growth capacity is of outmost importance in this process. As part of the negotiation process and before entering a proposed transaction, due diligence will be performed by the acquiring party to confirm financial records and other non-financial representations. Consequently, accounting records should be clean, so the acquirer and their advisors know exactly where the profits are coming from.

Identify risk factors, internal and external, that could thwart the potential transaction.  Although there is not much that can be done about the external factors (industry, regulations, macroeconomy), other actions could be taken, the sooner the better, to fix any deficiency in operations, processes, personnel, etc. The important question is whether it will be preferable to invest time and resources in dealing with the factors identified, or to accept a lower return in the sale transaction.   

Business valuation

The business's value is incredibly important information for any businessowner considering selling their business. Entering in a negotiation without a prior understanding of what your business is worth puts the seller in a position to lose money.  The business value depends on a variety of reasons like market conditions, size of the business, growth potential, workforce, customer contracts and relationships, industry performance, among many others. 

Tax implications of selling your business

Whether you sell your business assets or your stocks in your business, your transaction could have different tax implications, and you should plan to avoid pitfalls. Depending on how the transaction is structured, it may result in preference taxation like capital gains treatment which offer a lower cost than ordinary tax rates.

These are certainly difficult and uncertain times, and the question of whether this is the right time to exit the business or continue until the pandemic passes, is something many are pondering.  A business advisor can help and guide businessowners through this process to weight the best options available, maximize the value of the business and a potential higher return in a transaction.

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