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For many entrepreneurs, the sale or transfer of a business is like giving up a baby they have raised from infancy.
Certainly, there’s a lot at stake economically, given that 80% to 90% of owners have their financial wealth locked up in their companies, according to estimates from the Exit Planning Institute, an education, training and credentialing organization. Many owners also underestimate the many emotional aspects that go hand-in-hand with exiting a business.
Here are five mistakes owners should avoid when selling a business.
Failure to plan
Many businesses don’t have an exit plan or they don’t strategize adequately for a multitude of scenarios, said James Jack, who runs the business owners client segment at UBS Global Wealth Management. And that leaves them susceptible in the event of death, divorce or if a suitor, such as a private equity firm that’s hungry for a deal, comes knocking. Fifty percent of exits in the U.S. are involuntary due to death, divorce, disability, distress or disagreement, according to the Exit Planning Institute.
To avoid scrambling, or being forced to accept a lower purchase price, owners should scenario plan at least once a year with advisors that include a CPA, financial advisor, attorney and family members, if applicable, Jack said. They should also maintain an up-to-date business valuation.
Even with planning, it can take six to nine months to get from the point of starting the sale to consummating a transaction with an outside buyer, said Scott Mashuda, managing director of River’s Edge Alliance Group, an M&A advisor to businesses. “Failing to plan is planning to fail.”
Some owners, who could be used to a do-it-yourself approach, may try to do the same when it comes to a sale or transfer of their business.
But taking this step, without consulting outside advisors such as M&A specialists, valuation experts, CPAs and attorneys, is ill-advised, according to exit planning professionals.
Justin Goodbread, a certified financial planner and president of the wealth management firm WealthSource, offers the example of a six-figure mistake that he — a seasoned exit planning professional — almost made in a recent deal. Had it not been for his outside advisors, he would have signed an official letter of intent that would have limited his tax-planning ability.
“As a Certified Exit Planning Advisor, I know all of the necessary steps to take when navigating a business sale. Nonetheless, my eagerness to close the deal caused me to miss a step,” he said in email comments. “Because my attorney and CPA were involved, they were able to tell me to slow down, and we were able to transact in a more tax-sensitive manner,” he said.
Many business owners plan to pass their business to family – 44% according to an October UBS report. But, as the report illustrates, they aren’t always sure how to divide the assets or whether heirs want the business.
Sixty-seven percent of owners polled believed their heirs want the business and 33% thought their heirs would be most interested in assets from the sale. Among heirs, however, 52% claim to want the actual business, compared with 48% who said they prefer assets from the sale.
To help flesh out what’s important to both sides and ensure assumptions aren’t getting in the way of sound business decisions, Julia Carlson, founder and chief executive of Financial Freedom Wealth Management Group in Newport, Ore., initially holds two meetings — one for owners and the other for their children. “Because different things will be said if we all meet together first,” she said.
With founders, she discusses their desires for the future of the business and other financial considerations. Consultations with the children include their capacity and readiness to buy out the parents and run the company. If joint ownership between siblings is an option, she assesses their ability and willingness to work together. Armed with this information, she brings both sides together so they can begin to take the next steps.
Planning for a sale or business transfer should also include understanding what’s next — whether that’s volunteering, traveling, starting a new business or something else, said Scott Snider, president of the Exit Planning Institute. Whether exiting founders are 40 years old or 65 years old, it’s critical they determine their vision for the next stage, he said.
For many founders, the business has been the biggest piece of their life for 20 or 30 years, and the void can cause major emotional upheaval, including higher instances of divorce and general dissatisfaction with life. “They often feel like they’ve lost their identity,” Snider said.
Because their lives are so entwined in the business, owners sometimes stay involved for too long, impeding the successor owner’s ability to flourish. This can often be true with family-owned enterprises. Carlson offers the real-life example of a patriarch who decided a few years ago to transition the family business to his capable and willing adult sons. Instead of making good on this commitment, however, he continues to come into the office daily and micro-manage the sons’ business dealings, leading them to contemplate leaving to start their own business.
“The dad is so used to having run the business for 40 years that he feels it will fall apart without him.” If things stay as they are, however, the business could crumble due to his inability to let go, Carlson said. “It’s like the business is another child and he can’t give enough room to see the success on the other side.”