Many business owners assume their exit path will be a sale to a third party. In fact, some entrepreneurs start their businesses with the goal of finding a larger buyer, selling the business, and moving on to their next business idea. A cash sale can definitely draw business owners toward third-party offers rather than a sale to an insider (family, management, or key employees).
The reality is, however, that many business owners—even those who initially intend to pursue a third-party sale—choose to sell to a business partner, family member, or key employee instead.
What’s with the change of plans? Much of it has to do with four unexpected challenges many business owners face in a third-party sale.
Challenge 1: Threats to Financial Security
Third-party sales can be a two-sided coin. While they may attract the highest sale price, you may also be asked to finance the sale of the business. If you don’t receive the entire purchase price in cash at closing, you risk relying on the company’s new owners to perform well enough to support the payments due on a promissory note. If the company struggles after the sale—and you are reliant on the continued performance of the business you no longer own for post-exit security—you might find yourself in a financial tight spot.
Challenge 2: Seller’s Remorse
Some business owners are so focused on selling their businesses that they haven’t given any thought to what comes next or if the sale price (after costs and taxes—more on that next) can fund the lifestyle you desire. You might assume that you will figure out what to do with all this new free time afterward, only to panic as the sale date approaches.
Pulling out of a sale at the last minute happens and can have a ripple effect. Qualified buyers might shy away from businesses that go on and then come off the market without selling. Additionally, owners who don’t know what to do with their lives without the business can end up in an unfulfilling retirement.
Challenge 3: Tax Consequences
Taxes on the sale of your business can add up to a significant percentage of the sale price. Without proper planning, an attractive-looking offer could turn into you not being able to meet your retirement goals.
A pre-sale analysis and inventory of the business and personal tax consequences of a sale can keep you from going too far down the path with a buyer before you realize you can’t afford to sell the business for the price they offer.
Challenge 4: A New Direction
Buyers commonly want to make changes to their acquisitions, and the new owner’s vision may look very different than yours. You might regret selling to a buyer who radically changes your company, which can dampen your post-exit satisfaction. Even worse, you may decide you can’t stomach a radical change to your business and take it off the market—potentially damaging the company’s reputation and value.
Better Planning for a Better Outcome
Selling your business to a third party is a major decision, and it requires careful consideration. With proper planning, you can be better positioned to maximize your company’s value while fulfilling your goals and finding your freedom.
A financial advisor can work with you to help you identify your business and personal goals to understand how they work together. They can bring together the appropriate legal, tax, and business advisors to assist as needed. They can then help you review your options and build a business exit plan that meets your needs—whether that includes a third-party sale or a different solution. Contact us today to discuss developing an exit strategy designed for you!
Tom Fridrich is a non-registered associate of Cetera Wealth Services LLC.
The information contained in this article is general in nature and is not legal, tax, or financial advice. For guidance on your specific situation, please consult a qualified attorney or tax advisor. This article is for informational purposes only and does not represent all areas of professional advice. Exit planning often requires collaboration with multiple professionals, and we’re committed to helping you access the expertise you need.
Any examples are hypothetical and for illustrative purposes only.
