Building up a business is a valuable life experience, and selling it is just as exciting. Obviously there is the financial gain, but you can also point to it and say, “I made that.”
But, before you put up the virtual “for sale” sign, stop and ask yourself 3 questions.
1. “I Sold The Business. What Do I Do Now?”
You have spent most days for the past few years working to make your business a success. Revenue has been consistently coming in and the bills have been paid to keep the lights on. So, when you finally sell the company, those monthly revenues will suddenly stop — but the bills will not. You will only have your sales proceeds on which to live. That money is not going to last forever. Eventually, you will need to start spending it, and ultimately you will be left with nothing. You would be stunned at how fast it can disappear.
The solution is to have a plan before leaving the company, so you will know exactly where you will be going and how you will do whatever it is you plan to do next. Will you be setting up a new business by using the proceeds from the upcoming sale? Then budget for at least 20 percent more than you anticipate. Even better, test your new business startup before you sell to give yourself assurance that the new business will succeed. Can you survive on your sales proceeds until then?
When I sold my first business, I did not have a plan for what I would do next. I was fortunate to start my current company, but I cut it close. The first revenues from my current company hit the bank account on the day I was about to go broke.
2. “What Do I Have To Pay The IRS?”
In all the planning that business owners put into the sale of their business, it is surprising that many forget that the government will want some of your windfall. It is important to have a good idea of just how much they will take before you put your business up for sale. If you are going to answer the first question (“What do I do after I sell?”), you will need to know just how much money you will have left to get you to the next phase of your life.
So how much does the government take? The answer is: it depends on a lot of factors. Your business formation, how the purchase price is allocated, your personal income and your state of residence all have an impact. If you are lucky, and can classify the sale of your business purely as a capital gain, you will likely pay between 15-and-20 percent. What you need to worry about is whether taxing part of the proceeds, as income will put you into a higher tax bracket altogether. You could lose certain deductions and pay a higher rate on your regular income.
As if that were not enough, federal taxes are not the end of it. Your state then comes in, expecting their share. Some states will require that you escrow a portion of the purchase price to guarantee they get paid. In short, taxes are important to consider, as they will tell you how much profit you are going to make. Consult with an accountant before you put your business on the market to find out what impact the sale of your business will have on your taxes.
3. “How Much Value Can I Add by Waiting?”
Many of us are naturally impatient, especially when we have pressing plans that we would love to pursue. However, quite often, time can make a massive difference to the sale value. Buyers love businesses that prove their stability over time, so businesses that have a long, established history often garner higher prices. In addition, if your business is growing in profitability, it most likely is growing in value with each passing month.
There can even be potential value in waiting if your business is trending downward. Stabilizing profitability and showing potential buyers that immediate failure is not the destiny of the business will encourage buyers to take a bigger risk on your business than they might otherwise take. The value of your business changes frequently, so before you sell, get a sense for just how aggressively the value might change over the next 6-to-12 months and make a decision accordingly.
Clearly, selling a business involves a lot more than 3 questions. Pondering these 3 before taking action can build a solid foundation on which you can firmly decide whether or not you should move forward to the next stage.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
Image credit: CC by Robert Couse-Baker