Are you thinking about selling your business? As an entrepreneur and “small” business owner, you may have spent a lifetime building your business and a substantial net worth.
But then come the mistakes. Many millionaire business owners neglect to prepare for the sale properly. Others forget to consider how much cash they need in retirement to live their desired lifestyle. Some spend too little time thinking about how their new financial situation will impact their retirement, estate, tax, and philanthropic-related issues. Others neglect the impact on their mental health and validation of purpose. Some might not have sold for the right reasons.
Due Diligence Issues
You’ll have some homework to do before the sale closes. Here’s a checklist of items to consider:
1. Not Valuing Your Company Properly
Have you conducted a thorough valuation of your business to determine its worth? Some of our small business clients overvalue their company. Unrealistic expectations lead to overpricing and difficulty finding buyers. Conversely, undervaluing can result in leaving money on the table. Potential buyers will want thorough and accurate financial and legal records. We work with valuation specialists who can help avoid these pitfalls.
2. Failing to Know Your Potential Buyers
Who is buying your company? We suggest that our clients conduct comprehensive due diligence on potential buyers. To ensure a reliable and trustworthy acquirer, you should verify their financial stability, reputation, culture, and track record. We also partner with due diligence experts who do the investigative homework and analysis.
Many millionaire business owners neglect to properly prepare for the sale. Others forget to think about how much cash they need in retirement to live the lifestyle they want.
3. Not Prioritizing Confidentiality
Do you plan to maintain confidentiality during the sale process? Disclosing any sale aspect to the wrong people at the wrong time can lead to negative consequences, such as employee or customer concerns, supplier issues, or competitors taking advantage of your situation.
4. Negotiating Poorly
Have you thought carefully about negotiating the terms and conditions of the sale? Consider the purchase price, payment terms, non-compete agreements, and any ongoing involvement you may have in the business post-sale. Do you consider yourself a fair and tough negotiator?
5. Forgetting Your Employees
Are you thinking about the people who work for you? Consider the impact of a sale on your employees. They’ll want to know what may happen to them. Let them know. Likely questions include how long the sale will take and their role after the sale. Communicate transparently with your employees throughout the process.
6. Making Irrational Decisions
How do you avoid making decisions fueled by emotion? Selling your business can be emotional. However, emotional attachment can cloud judgment and lead to poor decision-making. Before a sale, don’t be afraid to pause the deal if all is not right. After the sale, don’t splurge on luxury items and travel. Approach the sale and proceed with a clear, rational mindset.
7. Impatience
How long will it take to sell? It may take years to sell your business. We’ve worked with clients who have worked on the sale for up to five years. You’ll need to be prepared for deals to fall through, persnickety potential buyers, lengthy delays by the legal people, and changing market circumstances.
We’ve worked with clients who have worked on the sale for up to five years.
Wealth and Asset Management Issues
8. Not Account for Taxes
What are the tax consequences of selling your business? ow you structure the deal will impact your taxes. An experienced accountant we partner with said one of the most common mistakes investors make is not understanding the tax ramifications of an asset sale versus a stock sale. For example, you may prefer a stock sale If you are a C-corporation. Buyers generally prefer the deal to be structured as an asset sale. We work with tax specialists who love helping with these complex issues.
9. Forgetting to Revise Your Retirement Plan
Is the retirement plan you put in place before the sale still relevant after the sale? As a soon-to-be-former business owner, you’ll need to reassess the retirement plan you created years ago. Your retirement plan may need to be adjusted to meet new objectives, timelines, and tax and estate implications. You also may need to find a new business healthcare plan. Your old plan may have vaporized post-sale; it’s time to find a new plan that fits your new circumstance.
10. Failing to Create an Estate Plan
Do you have an estate plan, or need to revise your current plan? After you’ve sold your business, you will likely need to outline a fresh estate plan to align with your new financial resources. Review and revise all wills, trusts, and beneficiary designations.
11. Mis-aligning Your Investment Strategy and Goals
Is your post-sale portfolio in line with your financial needs? Many new retirees have or think they need a substantial asset allocation in fixed-income investments for monthly income. But they also want to see their assets grow, not diminish, which is why we often suggest a large portfolio allocation in equities. A previous investment strategy that prioritized fixed-income investments would be a misalignment.
After you’ve sold your business you will likely need to outline a fresh estate plan to align with your new financial resources.
13. Not Understanding Your Net Take-Home Pay
Do you know how much income you’ll need after the sale? Many newly minted retirees want to draw monthly income from long-term assets. You’ll need to calculate your net take-home pay home after all regular expenses, plus potential legal fees and taxes associated with the sale.
14. Ignoring Professional Advice
Do you expect to handle the entire sale process yourself? Some high-net-worth business owners go this route. But you may know not know how to protect your interests best. Seeking professional advice from wealth managers, attorneys, accountants, and business brokers specializing in business sales transactions can provide valuable guidance in navigating challenging legal and financial issues.
About Aurora Investment Counsel
Aurora Investment Counsel seeks to provide peace of mind to high-net-worth and institutional clients through expert wealth management and investment management. Aurora serves clients in or close to retirement, career professionals, and owners of small businesses. We also work with investors who have sold or are about to sell their business, bequeath or receive an inheritance or have recently become widows or divorcees. In addition, we provide equity management services for family offices and institutional investors and consult with financial advisors looking for business growth and sub-advisory services. Aurora was founded in Atlanta, GA, in 1995 and currently manages over $200 million in assets under management.
About Mike Doyle
Mike Doyle, CFP® is the Vice President of Aurora Investment Counsel, a post he has held since 2005. Mike is responsible for client relationships and sales. Before joining Aurora, Mr. Doyle serviced high-net-worth and financial intermediary clients as a portfolio manager at Vestor Capital Corporation in Chicago. Mike holds the Certified Financial Planner® designation of the Certified Financial Planner Board of Standards, Inc. He earned a B.S. in marketing from the University of Georgia.
