Discover Strategies to Maximize Your Business Sale Value

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. 

You'll want to balance many variables by weighing offers and communicating with sellers. 

You will want to make sure you get enough out of the sale to finance your next endeavor, whether retirement or a new project. 

This will mean thoroughly understanding how much tax you'll have to pay and how to 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 the community. 

You should also consider what you plan to do after you exit the business, both in terms of your personal contentment and 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 your goals align with the seller's. If you find those goals don't align, looking at a different business probably makes sense. 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 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 must ask yourself before selling your business is: What's My Number? What are you looking to get from the sale regarding a dollar amount?

If you want to retire, how much must you live on once you've sold the business? It must be enough to live if you're not interested in pursuing 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 will 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. Still, 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 the piece you're missing to the table?” says Hayden.

The Importance of Succession Planning

Understanding your number 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 several months before putting it on the market.  

A business 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 cornerstone of our ACE Framework 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 ensuring 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 a 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 owner of the qualified small business stock to be exempt from up to $10mm in capital gains tax,” says Hayden.

Again, this is where succession planning comes into play well before you 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. 

The owner may defer capital gains on the share of sales to the ESOP in a C-Corporation 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 – 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 would be paid back for their initial investment. 

Have they been paid back in full if they simply provided a loan? 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 having 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 aligned with your interests regarding your employees. 

Many 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 research 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 several ways, 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 aligned with your community goals?  

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

It's unlikely that a private equity buyer will continue contributing to the community like 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 find a buyer who thinks about your customer goals similarly?

Perhaps you take great pride in your pricing or like to ensure 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 is less concerned with ensuring 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 and what the transition between you and the buyer looks like. 

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

Setting expectations around a succession for you and the buyer is important. Ask them directly what they envision for the transition. 

If they have a 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 the transition phase. 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 $100K next year and another $100K the year after. 

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

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

FAQS

Conclusion

Balancing these various factors when selling your business is no easy task. Still, it is necessary if you're looking for a sale that meets your financial needs while 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 business optimization when 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