Just as it took longer to build you business than it did your house, it will take longer to transfer it to someone else.
If you think you can simply cash out of your company, you have not prepared yourself to maximize your gains. It’s best to figure on a 3-7 year post sale involvement. Selling businesses is about LEVERAGE. Buyers are looking to minimize their return on investment, which means you (the seller) needs to carry a note (ideally 50% of the sale price) in order to get top dollar.
Carrying a note, or financing the sale, requires you to act as a bank for 2-3 years. In this capacity you must watch over your investment by reviewing financials on a monthly or quarterly basis, advising the new owners as necessary, and make sure payments are made in a timely fashion.
If all goes well, you’re paid in full in 2-3 years and can move on. If not, you’ve been paid 60-70% of the price you sold the business for to take a 1-2 year break. In the case of a default, you regain ownership of the business , take1-2 years to prop it back up and sell it again.
Fortunately, a default situation is rather rare (under 5%) but if you don’t prepare yourself for the post sale involvement, you’ll get 30-50% less for you company when selling.
If you’re considering selling your business in the next 3-5 years, sooner may be better than later.
At the last minute in 2010 the government decided extend capital gains and personal income tax rates another two years, giving business owners more time to enjoy low rates. Don’t let this gift go to waste
As it sits right now, in 2013 the capital gains and income tax rates will increase and the hike will have a drastic effect on your sale. A 5% increase in these taxes would increase taxes $100,000 on a $2 million sale. That doesn’t include any federal or state income taxes that will be increasing and taking an even larger portion of your proceeds.
In order to avoid getting hit with these extra taxes consider putting your business up for sale in late 2011 so you can close before the increases kick in.
When I began investing in the stock market, I was great at picking the stocks that would shoot up 25%, 50% , 100% but invariably held on to these too long and watched them come right back down. I can still name them today, Tempur Pedic, Jones Soda, Lucent and Under Amour; just to name a few. It wasn’t until I learned to develop an exit strategy for each stock I purchased that I began seeing some serious growth in my portfolio.
Business owners start their companies and run them every day never giving serious thought to when they should cash out. This is a serious mistake. As we’ve all learned from the past five years, things change and there are many factors that are outside of our control. Key employees leave, economic trends fluctuate, and competition can come out of nowhere. Just like with stocks, each small business has an optimal time to sell it.
Procrastinating when it comes to thinking about selling your company can cost you dearly. Educating themselves on the selling of their business should be included in the top priorities of each business owner. It should rank up there with increasing revenues, reducing costs and managing cash flow.
The worst plan is no plan at all.