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Buying business – personal expectations when selling a business

Buying business - personal expectations of selling a business

Buying business – where to next?

Before deciding on the best way to exit a business, it is important to consider the reasons for this transition. Some people will retire, some will take an extended holiday and some will re-enter the workforce as an employee. Others will buy another business or establish a new venture.

Research shows that 52% of small business owners planning to exit their business intend to retire, and 14% intend to start another business. It is important that business owners think about the journey, not just the destination. Make sure health and wellness is a priority even in the building phase of the business. A strong, healthy body means a strong, healthy mind.

Industries and businesses are subject to economic cycles and, at certain times, businesses will perform better or worse, depending on the business cycle. Ideally, a vendor should sell when industry conditions are good but it is sometimes difficult to pick the top of the market. In many cases, industry cycles will be less important than the personal reasons for selling.

In some cases, an entrepreneur becomes burnt out, faces illness or is forced to exit a business for personal reasons. This can result in a sale needing to be completed by a certain date and/or at a reduced price, which is obviously not desirable.

Like so many facets of business, the key to a successful sale or transition lies in careful planning.

Most buyers will require the seller to have some involvement in the business after the sale to ensure the intellectual property, staff and customer loyalty are smoothly transitioned. If a buyer considers a handover period too narrow, the perceived risk increases and this will be reflected in the price on offer. It is important that the business owner(s) factor into their exit plans a possible 12-24 month earnout should the business be sold to a strategic investor.

“I wish I had spent more time building my business and accumulating wealth!” “I wish I had spent more time with my family and enjoying myself!”

Personal Goals – Should they take more priority in your planning?

What do you think is more likely that person would say in their dying breath? What implications does this have for you when thinking about your wellness and exit plan?

Personal considerations

In some instances, the new proprietor will want the business owner to work in the business as an employee for an agreed period of time. The transition from owner to an employee is not always an easy one. Relationships with other staff members need to be redefined and the seller is required to accept the changes made by the new proprietor.

When considering a business owner’s involvement after the sale, it should be noted that sometimes there are significant cultural differences between a large and small business. If a small business is bought by a bigger entity, tension often arises when a former owner needs to conform to the practices of a larger corporation following the sale. For the former owner, this can create a considerable emotional burden during the transitional phase.

Buying Business – What you should know before selling your business

It may be better for the vendor to act as an advisor or consultant to the business, where the buyer is able to still draw on a thorough knowledge of the business operations and the industry and to receive strategic advice. The advantage of this option is that it provides a regular stream of income for a period of time after the sale, without the restrictions of full-time employment. This provides the seller with time to develop new hobbies or business ventures.

Sellers also need to consider their vision for the business. Most owners have an emotional attachment to a business that has been their ‘baby’ for many years and has become part of their identity. They want the brand and the business to thrive after their departure, which means sometimes a certain type of buyer might hold more appeal.

Before embarking on this exit and transition journey, a business owner should sit down and think about themselves. Who are you as a person? What are your values? Do you want to leave a legacy or reward, or take into account anybody else’s welfare when exiting? When you exit, will you retire, buy another business or work? Will it be paid work or volunteer work? What hobbies/activities will you have? What are your commitments to friends/family? What study or self-development will you take on? What investment projects/new business ideas/revenue making projects, concepts or ideas will you take on?

Financial considerations

Before selling, a vendor needs to calculate how much money is needed for the sale to sustain a desirable quality of life for the owner.

This is particularly true of owners planning to retire, as they need to consider the likelihood of increased medical expenses and the future possibility of needing assisted living. There is a large percentage of business owners that have retirement income funds below the national average and below the level needed to support themselves.

Buying Business – How to Create A Valuable Business

Many younger people sell a business with the intention of buying or starting another enterprise. In these cases, it is still important that the proceeds from the sale are sufficient to fund a new business, maintain a happy lifestyle and possibly to have an extended start in a new venture.

Here is a scenario where a 50-year-old business owner sells his/her business for $877,000 after expenses and tax. If he/she earns 5% interest per annum and spends $84,000 on their lifestyle every year afterward, the cash will run out when the business owner is aged 65. Therefore, the business owner needs to consider spending less each year, selling his/her business for more or make the money work harder in an investment fund. This assumes the business owner has no other personal wealth that will generate an income.

My best advice to anyone considering selling their business is to always seek professional advice from a qualified advisor!

Author: Kathleen Dale, Business Advisor and Founder of Compass Business Advisory.

Business Advisor and Compass Business Advisory Founder Kathleen Dale in Townsville North Queensland
Image: Kathleen Dale, Business Advisor and
Founder of Compass Business Advisory

 

 

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Disclaimer

Kathleen Dale
Kathleen has a Bachelor of Commerce and a Major in Business Law and employment law. Kathleen is working on her honors in Occupational Health & Safety & Environment Management and Human Resource because Kathleen believes these areas give Compass Business Advisory an opportunity to give clients the best possible outcomes. Kathleen's experience is vast from a union delegate to a safety officer. Kathleen is a specialist in Small to Medium business, has personally owned and sold her own successful businesses and business compliance is her specialty.
https://www.compass-businessadvisory.com/

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