Any exit strategy has its pros and cons. But the most effective exit plans have contingencies in all of them. A well-thought-out exit plan is essential to a successful migration. That’s why we want to take a look at some of the common blind spots owners encounter when selling their business on the open market.
Even if you are not thinking of selling now, you will eventually quit your business. There comes a time when you can no longer fulfill your obligations of ownership. Whether through personal choice, disability or death, the reality is that one day you will leave the company.
So the sooner you start planning for that exit, the better. This is especially true when considering that finding the right buyer is often a long and difficult process. As you can see, thousands of companies go up for sale each year, but the pool of buyers is relatively limited. The ratio of companies on the market to potential buyers is part of the reason why only about 20% to 30% of companies are able to sell. (opens in new tab).
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Likewise, the sheer volume of businesses available makes it difficult for buyers to set their sights on the right business. (opens in new tab) 58% of buyers revealed that finding the right item is the most difficult aspect of the buying process. Therefore, taking early action to prepare your business for sale will make it more attractive to potential buyers and improve your trading chances.
Reveal blind spots in your exit plan
Selling to buyers on the open market offers unique advantages for sellers. But having potential blind spots means you need an exit plan that accounts for all potential outcomes. Of course, this is difficult to do. Because you don’t know your blind spots. This is why we work with a Certified Exit Planning Adviser (CEPA). (opens in new tab) Or a business coach is very beneficial.
Working with CEPA can uncover some holes in your exit plan and prepare you and your business for selling on the open market. Executing a personalized exit plan provides them with valuable insight from their own experiences. This is invaluable to small business owners who often suffer from near-field blindness.
When you work so closely with something, as business owners do in their own businesses, it becomes difficult to see it for what it is. This is especially true after years of putting blood, sweat and tears into the business. Research shows that entrepreneurs have similar attachments to their businesses. (opens in new tab) that of parents and their children. No parent thinks their baby is ugly, so few owners face all the problems of their business. Therefore, having an objective eye is very helpful in exit planning.
It is clear that you need an exit plan and that someone who can work with you objectively through the process is important. But what are the benefits of selling your company on the open market Perhaps more importantly, what are the potential blind spots entrepreneurs face when choosing this type of exit?
Third-party sales often have the highest potential payout caps of all exit paths. This is especially true when buyers are making strategic purchases. Unlike sales to family members or key employees, you typically receive most of the purchase price at closing, rather than over several years. This combination of a high maximum selling price and a lump sum payment is a very attractive exit method for business owners.
However, with this advantage comes danger. In many cases, there are several provisions in the sales contract. These can take the form of earnouts, clawbacks, retention rates, etc. The problem is that you may not receive the full purchase price at closing.
For example, if a business receives a $10 million offer and receives 50% when closed, the remaining $5 million depends on the company’s performance during the clawback period. Therefore, you cannot rely on receiving the full purchase price. This is a blind spot that many business owners miss. CEPA helps you prepare for this possibility before you reach the closing table.
Time issues can creep up on you
Selling a business takes time. Selling to open market buyers is usually one of the quicker trading methods, but it still takes time. This can create another potential blind spot. You’ve spent years preparing your business for this moment. Yet it is this very moment that costs you. Please let me explain.
Once you start trading, your attention shifts from the business to the trade. Something breaks because you lose focus on your business. Perhaps it’s an internal system that didn’t lock down as well as you thought it would. But as long as you keep your full attention on the business, it worked. Either way, while you’re focusing all your time and energy on closing deals, something can break.
Buyers see this as a risk and often try to renegotiate. Now you are stuck. At this point you have likely spent hundreds of hours selling and are emotionally invested. I don’t want to negotiate against myself. Again, investing in time is something a coach can help with.
reduce tax burden
One of the only certainties in life is paying your taxes. This is especially true if you sell your business. Regardless of how your business is structured, you will face tax landmines unique to your entity.For example, if you started your company as a C corp (opens in new tab) Never converted to S corp (opens in new tab)may be taxed twice on the final selling price (once at the corporate level and once at the individual level).
This is where you really need to lean into your advisor. Exit He determines the path and takes the necessary steps to reduce the tax burden associated with the sale before it hits the market. Avoid this costly blind spot by staying in close contact with your tax planner or advisor.
There are a myriad of potential pitfalls when leaving a business, but working closely with a CEPA or business coach can ultimately save you a lot of grief.
This article was written by and represents the views of a contributing advisor, not Kiplinger’s editorial staff.Advisor records can be viewed with the SEC (opens in new tab) or at FINRA (opens in new tab).