What Are You Optimizing For When Selling Your Business?

If you’re considering selling your business, you should think carefully about what you’re looking to get out of a sale – both in terms of the purchase price and how your values align with the new owner. 

There are a lot of variables you’ll want to balance as you weigh offers and communicate with sellers. 

You’re going to want to make sure that you get enough out of the sale to finance whatever your next endeavor is, whether that’s retirement or a new project. 

This will mean having a thorough understanding of how much tax you’ll have to pay and the ways you can defer capital gains through things like a 1045 rollover. 

Next, you’ll want to ask how the potential buyer will deal with your stakeholders, including investors, employees, customers and your community. 

You should also consider what you plan to do after you exit the business, both in terms of your personal contentment as well as how involved in the transition you want to be. 

It's important to note that this article is also useful for business buyers. Before beginning the business search process, you should ensure that you're goals are aligned with those of the seller. If you find those goals don't align, it probably makes sense to look at a different business. We want to ensure that the legacy created by these business owners is maintained and everything they've built – and the people who helped them build it – are taken care of and given every opportunity to succeed.

Let’s look at all of these points in more detail so you can get the best value when selling your business.

What’s Your (post-tax) Number?

One of the most important questions you need to ask yourself before you sell your business is: What’s My Number? What are you looking to get out of the sale in terms of a dollar amount?

If you’re looking to retire, how much do you need to live on once you’ve sold the business? It must be enough to live if you’re not interested in pursuing any other opportunities.

“This is, obviously, highly dependent on your expenses (where you live, your lifestyle, and other factors) and what you plan on doing with the money,” says Hayden Miyamoto, CEO and co-founder of Acquira.

 Are you investing in real estate vs bonds? Are you buying another business? 

Let’s say person A lives in California and is used to living on $250K a year but they only invest in bonds and generally make 3-4% above inflation. They’re going to need $8.33 million to generate that much income per year. 

Person B, on the other hand, lives in rural Montana. Their living expenses are $80K a year and they have some real estate or investing experience and can anticipate about 10% per year. They would only need $800K. 

“Two different people, both solving for the same thing but with very different lifestyles,” says Hayden. 

You might be looking to retire outright and exit the company completely but maybe you are simply looking to downshift into fewer responsibilities or offload the portion of the job that you don’t like. 

You can also consider retaining a minority ownership of the business. 

“All of these are options, and it's something to look for with a buyer. Does the buyer bring to the table the piece that you're missing?” says Hayden.

The importance of succession planning

Understanding what your number is should also factor into succession planning well before you sell your business. 

This means taking the steps necessary to grow and optimize your business for the best exit at least a number of months before actually putting it on the market.  

A business that is largely centered around you as the owner is much more challenging for another person to take over. You might only get 3X for your business because it is owner-operated. 

If you take the steps to systematize operations under a management team, it is much easier for another person to take over. Businesses like this can trade for around 5X. 

A systematized company has a way to create priorities and can define its mission, vision, and values. It runs from a budget and forecasting model, has a leadership team, has clear job descriptions, operating procedures and KPIs and has regular performance reviews. This is a cornerstone of our ACE Framework, which gives business owners the tools necessary to move from an owner-operated company to a management-led business.

Don’t forget about taxes

Another crucial component in making sure you get Your Number is accurately forecasting how much you’ll pay in tax. 

“Tax is really, really important and sellers don't always think about it,” says Hayden, “and then they are really surprised by the fact that they owe 30% of their sale to the government.”

One way to defer your capital gains is to use a Qualified Small Business Stock (QSBS), sometimes called at 1045 rollover. 

This can only be used if your business has been a domestic C-corporation for at least five years and meets certain other eligibility requirements. 

“The QSBS allows each individual owner of the qualified small business stock to be exempt from up to $10mm dollars in capital gains tax,” says Hayden.

Again this is where succession planning comes into play, well before you actually sell your business.

“If you’re succession planning years in advance, and you want to sell and you're structured as an S-corporation, as 90% of companies are, you may want to convert to a C-corporation,” says Hayden.

You can also consider selling to your employees through an ESOP. 

Capital gains on the share of sales to the ESOP in a C-Corporation may be deferred by the owner as long as the ESOP owns more than 30 percent and the seller reinvests the proceeds into specific qualified securities, such as real estate, within 12 months of sale.

Another important factor is whether you are selling the business as an asset sale – where the buyer purchases the individual assets and liabilities – as compared to a stock sale – where a buyer purchases the owner’s share of a corporation.

What are you optimizing for?

Outside of financial considerations, you should think about optimizing in terms of the other stakeholders in your business, namely investors, employees, customers and your community. 

Your investors

If you have investors, what are they looking for in a sale? 

“What kind of return do they need? Talk to them,” says Hayden.

This will depend on how they were going to be paid back for their initial investment. 

If they simply provided a loan, have they been paid back in full? Have you set up a system where you can buy back their shares for an agreed-upon buyback price?

Your employees

You’ve likely spent years, if not decades, growing your business and you have a personal relationship with your employees. How important to you is it that they are taken care of? 

You’ll want to find a buyer who is aligned with your interests as far as your employees go. 

A lot of private equity firms, for example, operate on a fairly short timeline and will likely move to cutting costs to ensure a reasonable return on investment. This often means job losses. 

“Typically, the employee exodus in a private equity transaction is often as high as 50%,” says Hayden. 

You can also do a little research into potential buyers to see how they have treated other purchases in the past. 

Another core component of the ACE Framework is that we prefer to promote from within and optimize for the employees. We do this in a number of ways, most notably an ESOP (Employee Stock Ownership Program). This provides the employees an opportunity to become stakeholders themselves. It has the added benefit of helping to lessen the impact of that employee exodus.

Your community

Do you want to find a buyer who is aligned with your community goals?  

Perhaps you are a community leader and like to invest your time and money into projects that improve your neighbourhood – perhaps you sponsor children’s sports teams or donate regularly to your church. 

It’s unlikely that a private equity buyer is going to continue contributing to the community in the same way an individual buyer would.

Acquira believes that a culture of community service is key to having a strong team of servant leaders, and a strong team is key to having an effective and meaningful workplace. This is a large part of our training with our buyers – our core values of SERVE are part of everything we do.

Your customers

The same goes for your customers. Is it important to you to find a buyer who thinks about your customer goals in the same way?

Perhaps you take great pride in your pricing or you like to make sure they are well taken care of. 

Are you looking for a buyer who wants to maximize profit by increasing sales to the maximum amount or who is less concerned with making sure your long-term customers are taken care of?

What are you doing with your life after the sale?

You should also think about what you want to do after the sale – both in terms of what will bring you personal contentment but also what the transition between you and the buyer looks like. 

A lot of people can get a bit of an existential depression after selling the business they took so long to build and that took up so much of their time and energy. 

It’s important to set expectations around a succession for you and the buyer. Ask them directly what they envision for the transition. 

If they have a very detailed idea of how involved they want you to be and for how long, they’re likely taking the succession planning very seriously. 

If they receive a vague answer or an answer that doesn’t suit your expectations, they’re probably not a buyer of choice. 

It’s ultimately up to you and the buyer to sort out what the transition phase will be. The sweet spot is generally somewhere between six and 12 months. 

Any transition can be challenging because you no longer have control and that’s often hard for people who’ve owned a business for 20 years, says Hayden. 

“Obviously the new buyer will make mistakes and you have to watch them make mistakes and then hold your tongue and not say, ‘I told you so.’ So, it's difficult,” he says.

Earnout phase and private equity

Private equity firms will often offer an earnout phase equal to between 20 and 30 percent of the purchase price over a period of one to three years so that you stick around and offer your expertise. 

Let’s say you sell your business for $1 million. A private equity firm might give you $800K now and then give you $100K the next year and another $100K the year after that, for example. 

However, this can also be extremely challenging as you watch the firm enact some of the changes discussed above – cutting costs through austerity and the exodus of staff. 

“This is almost unanimously a terrible experience for sellers,” says Hayden. “And many of them actually ended up leaving before their first year and actually giving up on that earnout portion of the business.”

Conclusion

Balancing all of these various factors when selling your business is no easy task but is necessary if you’re looking for a sale that meets your financial needs while also aligning with your desires for how the business will interact with its employees, customers and community.  

A lot of this work begins well before you ever put your business up for sale. 

Acquira's ACE Framework exists to help business owners transition from owner-operated to management-led – a crucial step to maximize the price you’ll get for your business. 

If you’re interested in learning more about how to optimize while selling your business, schedule a call with us through the form below. The form will also help you determine the ballpark value of your business before you speak with our representative.

Key takeaways

• Succession planning should begin years in advance of selling your business
• Your lifestyle and how you invest your money determine how much you want from a sale
• Maximizing your return depends on a thorough understanding of how you’re taxed
• Finding a buyer who wants a similar transition period can ease your next phase