You have worked hard to build your business. Years, even decades, have been committed to building your business and earning your reputation. Now that the time to begin considering a succession plan has come, there are a number of key issues to consider. Once you have made the decision to hand your business over, perhaps the greatest question you may need to consider is how the deal will be financed.
There are numerous ways to finance a handover of your business. The method you choose may depend on not only the particular buyer, but also whether you want to receive regular payments from the handover of simply get a lump sum payment once the transaction is complete.
Whatever you decide to do, the very first step will be getting all of your paperwork in order. This may include tax records, inventory, accounts receivable, accounts payable, real estate holdings and more.
Once you have all of the necessary information in order, it’s now time to make some decisions.
What is the Business Worth?
Before any financing for a handover can take place, the business must be assigned a value. This can vary greatly from business to business, and can depend largely on the type of business being discussed. Although there are some common methods of valuation, such as X times trailing earnings, you may be best off consulting a business broker or advisory firm.
Where Can the Business be Improved?
Anyone seeking financing to purchase a business will not only scrutinize the financials closely, but potential lenders will also take a very hard look at all aspects of the business before loaning funds to purchase it. If you see any major gaps in operations or other areas that can be improved, in may be wise to make such improvements before looking to sell.
Would you Prefer an Income Stream or Lump Sum?
The answer to this question may largely depend on your goals after selling the business. There may also be some significant tax ramifications to consider as well. Although financing may look attractive at first glance, that potentially higher rate of return may also come with some serious headaches.
Just because you have sold a business does not necessarily mean that you no longer have any liability in the business. Any transaction should spell out who is responsible for issues arising from pre-sale operations. In addition, any financing agreement must also lay out terms of the sale and how you will be paid. You should also include a course of action should the buyer default on financing payments. This is an area in which a qualified business attorney is money well-spent.
The process of handing over a business can take considerable time,often a year or more. In the meantime, make sure to continue to run a tight ship and run things “business as usual.” Patience may pay large dividends when it comes to handing a business over, and making sure all potential issues are covered will help ensure a seamless transition.
Edward Schinik has been with the Investment Manager since 2009 and has been with one Affiliated Investment Manager since 2005.