This is a guest post written by Jock, founder of online brokerage service, Digital Exits.
Devoting yourself to building a business can be one of the most valuable life experiences you’ll ever go through. Excitement and passion combine and you accomplish things you probably thought were beyond you.
Selling the business you’ve worked so hard to build can be just as exciting.
Before you start putting up your for sale sign and working on selling the business, you should stop and ask yourself three key questions:
- What are you going to do next?
- How much is your tax bill going to be?
- Can you make more by waiting?
The answers that you come up with are going to help guide you once you have sold the business.
Failing to address any of them could have you finding yourself in a situation where you have more time on your hands than you know what to do with.
You could also find yourself facing huge fines and penalties from the tax man for failing to pay the right taxes after you sell.
Finally, you could end up leaving money on the table because you’ve rushed through the process.
Let’s dig into each of the three different questions, so you can get a better idea of what you need to ask and think about.
1. What are you going to do after you sell the business?
No doubt you have devoted a significant amount of your time (and your life) to growing the business and making sure it’s successful. Hopefully you’ve hit all the goals you set for yourself, personally and professionally.
Revenue has been growing and you’ve made sure to keep the bills paid and keep your lights turned on.
So whenever you decide to finally sell the company, that revenue is going to end, but the bills you’ve accumulated won’t stop. You’re only going to have the money from the sale to sustain yourself once the business is passed onto its new owner.
That money isn’t an endless supply, either.
Eventually, you are going to have to start spending it, until it dwindles down to nothing. It’s stunning how quickly a large sum of money can disappear, especially when you’ve been working for it so hard and now have too much time on your hands.
The solution to this problem is to make sure you have plans in place before you actually sell the company. You need to know exactly what you want to do, and how you’re going to do it.
Are you going to build a new business by using the earnings from selling your existing business? If you are, then you’ll want to budget at least 20% more to get it started than what you’ve budgeted.
Going one higher, you may want to even test getting the new business off the ground before you sell your current business so you can build confidence in the model you’ve chosen and know that it is going to succeed before you sink yourself too deep into it.
Are you able to survive on the earnings from the sale of your current business until the new business plans reach a point where they can sustain your lifestyle?
Many entrepreneurs that sell their business simply do not have a plan for what they want to do next.
While they were fortunate in their first business, the earnings from selling it hit their bank account and then they start dreaming about how to spend it or, worse, are already headed towards being broke and need the earnings to bail them out — leaving them nearly nothing to move forward in life.
2. How much is your tax bill going to be?
It’s surprising how often it happens. With all the planning that business owners do whenever they’re trying to figure out if they want to sell, they forget that they also have to pay the government.
Most governments will want a chunk of the new windfall you’ve earned for yourself, and failing to pay them can put you into sticky situations.
It’s important that you have a realistic idea of how much money you are going to have to pay them.
If you can answer the first question here – what will you do after the sale? – you’ll also need to know exactly how much of the earnings from the sale are going to be left for you. Starting the next phase of your life with less than you thought you were going to have is a recipe for disaster.
How much of the earnings from the sale your government is going to want to take depends on quite a few different factors.
They’ll take into account how the business was formed and structured, how the purchase was allocated, your own personal income, and where you currently reside.
You need to think about whether or not the total earnings from the business is going to elevate you to a new tax bracket. If it does, you could lose out on some of the tax relief you were banking on.
It’s in your best interest to work with an accountant before you actually list the business for sale. Find out how much of the final sale price you are going to need to devote toward paying the government to avoid nasty surprises later.
3. Can you make more money by waiting?
Entrepreneurs tend to be impatient people. This is even more true when they have plans put into place and are ready to capitalise on their goals.
Most times, though, this impatience can lead to leaving a large amount of money on the table when it comes to calculating the final sale price.
Investors love to purchase businesses that have proven stability over a long period of time, so if your business has a long, established history, you can typically ask for higher prices.
On top of that, if the profitability of your business has been growing month after month and year after year, the value of your business is also increasing – often exponentially.
You can also make more money if the business has been on a downward slope by holding out until you’ve managed to get the earnings to stabilise.
Stabilising the business and showing investors that their risk of failure is not present, or has been dramatically reduced will go a long way to helping them want to make larger offers to buy the business from you.
The value of your own business changes from time to time, so right before you decide to sell you should take a step back and look at the projected earnings over the course of 6 to 12 months.
Base your decisions on the trends of your business, and how you see the earnings increasing or decreasing over a period of time leading up to the sale.
Really thinking about selling?
Selling a business involves more than these three questions, however they are perfect for opening your eyes to areas that you may not have addressed when you decided to sell.
Building a solid foundation for how you’re going to sell the business, and what you’re going to do with both your time, and your money once the business sells can save you a lot of frustration and heartache as you’re moving into the next stage of your life.
Jock is the founder of Digital Exits, an online brokerage service. Jock has been featured in Forbes and contributed to numerous websites and podcasts. He specialises in appraising and buying/selling online businesses and enjoys helping other entrepreneurs do business online.