How do you know when to sell your business? What factors should you look at? Have you thought about an exit strategy? These are good questions to ask now, before you offer your business for sale.
Specifically, you are going to want to have a plan for the transfer of funds that comes from the proceeds of the sale. Of course, you are going to want to make sure that there are proceeds! How will you know if there will be proceeds? Let’s start with that.
Four Simple Steps
Here are four simple steps that will help you know when you can exit with proceeds.
1) First, know the value of your company. (80% of business owners do not know their value.) If you do not know the value of your company find someone like Century Business Advisors that can help you determine the value.
2) Next, define what you need or expect when you exit. This is where planning comes in. The funds that you need will in part help you define your exit strategy.
3) Do a simple math problem: Value of your company minus what you need. Is the answer greater than zero? If it is, you’re in good shape. However, before you put your company up for sale, you need to move to the next and final step in the process.
4) Answer this question: Will the market pay you the value of your company, that was determined in step one? You may think your company is worth a certain amount. But the reality is that the value is really what others are willing to pay—not what you think. What others will pay is called market value.
If you went through the four steps and are prepared to sell at market value and receive funds, the next step is to begin actively planning for the transfer of the value from your company. How and to who will it transfer? There are lots of options and this is where it is advisable that you receive guidance from experts such as your financial planner, tax attorney and CPA.
They can advise you on the many options and the best way to structure things. Funds can be distributed to family members, which can affect their tax burdens. Or funds can be distributed into trusts that are set up ahead of time. On the other hand, maybe you prefer to have funds distributed to you or others over a period of time. Trust and tax attorneys are usually a good source for outlining the options available to you.
Employee stock ownership plans (ESOP’s) are another option. Setting these up also involves some pros and cons, depending on your goals, as well as how and when you want to receive your funds. Maybe you are planning to start another business, or invest in another venture as a partner. Possibly, you are planning to purchase that farm in the country and raise a rare breed of horses. Whatever your plans are, be sure to seek professional advice to avoid costly mistakes.
To summarize, plan ahead! Plan your exit strategy early. Know the value of your company. Know what you want to get out of it when you sell. Know what the market is willing to pay. Be ready to implement your plan on the day that the sale closes.
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