Regardless of your exit strategy, each has positives and negatives. However, the most effective exit plans have contingencies for all. A well-thought-out exit plan is vital to a successful transition. That’s why I want to look at some of the common blind spots that owners encounter when selling a business on the open market.
Even if you are not currently thinking of selling, at some point you will exit your business. There will come a time when you will no longer be able to perform your ownership duties. Whether by personal choice, disability or death, reality dictates that one day you will leave your business.
Therefore, the earlier you start planning for that outing, the better. This is especially true when you consider that finding a suitable buyer is often a long and difficult process. You see, there are thousands of businesses for sale in any given year, but there is a relatively limited pool of buyers. The ratio of businesses on the market to potential buyers is part of the reason that only about 20% to 30% of businesses 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 zero in on the right one. In fact, a recent survey by BizBuySell.com (opens in new tab) found that 58% of shoppers believe that finding the right fit is the most challenging aspect of the buying process. Therefore, taking early action to prepare your business for a sale can make it more attractive to potential buyers, improving your chances of a transaction.
Discovering blind spots in your exit plan
Selling to a buyer in the open market presents the seller with unique advantages. But potential blind spots mean you need to have an exit plan that accounts for all possible outcomes. Of course, this is difficult to do since, by nature, blind spots are unknown to you. That’s why you work with a Certified Exit Planning Advisor (CEPA) (opens in new tab) or business coach is so helpful.
Working with your CEPA can help you spot some of the holes in your exit plan, better preparing you and your business to sell on the open market. As you go through your personalized exit plan, they will provide valuable insights from their experience. But more than that, a CEPA or business coach can see things objectively. This is invaluable for small business owners who often suffer from proximity blindness.
When you work so closely with something, as business owners do in their businesses, it becomes difficult to see it for what it really is. This is especially true after you have put years of your blood, sweat and tears into a business. Studies have shown that entrepreneurs develop a similar bond with their businesses (opens in new tab) to their parent and child. Since no parent thinks their child is ugly, very few business owners will see all the problems with their business. So having an objective set of eyes can really help with your exit planning.
It’s clear that planning your exit is necessary and that it’s important to have someone who can work objectively alongside you through the process. But what are the benefits of selling your company on the open market? Perhaps most importantly, what are some of the potential blind spots entrepreneurs face when choosing this type of exit?
Financial aspect
Third-party sales often have the highest ceiling on potential payout among all exit routes. This is especially true if the buyer is making a strategic purchase. Unlike selling to a family member or a key employee, you’ll typically receive most of the purchase price at closing, rather than over several years. This combination of having a higher ceiling on the sale price and receiving it in a large amount makes this exit method very attractive to business owners.
However, this benefit does not come without its risks. Often, purchase agreements have several provisions. These can be in the form of profits, returns, retention rates, etc. The problem is that you may not receive the full purchase price at closing. The remaining balance can be greatly reduced through these provisions.
For example, if you receive a $10 million offer for your business and receive 50% at closing, the remaining $5 million is contingent on the company’s performance during the payback period. Therefore, you cannot depend on receiving the full purchase price. This is a blind spot that many business owners miss. A CEPA can help you prepare for this eventuality before you ever get to the closing table.
Time issues can overwhelm you
Selling a business takes time. Although selling to an open market buyer is usually one of the fastest transaction methods, it still takes time. This leaves you open to another potential blind spot. You’ve spent years preparing your business for this moment. However, it is precisely this moment that can cost you. Let me explain myself.
When you start transacting, your attention shifts from your business to the transaction. Because you are no longer focused on the business, something breaks. Maybe it’s an internal system that you haven’t shut off as well as you thought. But it worked as long as your full attention was on the business. Either way, something breaks while you’re focusing all your time and energy on closing the deal.
The buyer will see this as a risk and, often, will try to renegotiate. Now, you’re stuck. At this point, you’ve likely spent hundreds of hours working on sales and are emotionally invested. Do you back out of the deal, or do you agree and accept the new terms? You certainly don’t want to negotiate against yourself. Again, the time investment is something a coach can help you with.
Reduce your tax burden
One of the only certain things in life is that you will pay taxes. This is especially true when selling a business. No matter how your business is structured, you will face tax landmines specific to your entity. For example, if you started your company as a C corporation (opens in new tab) and never converted it to an S corporation (opens in new tab)you may be taxed twice on the final sale price (once at the corporate level and again at the personal level).
This is where you really need to rely on your advisors. Determine your exit path and take the necessary steps to mitigate the tax burden that will come with a sale before you hit the market. Avoid this costly blind spot by staying in close communication with your tax planner or advisor.
Although there are a host of potential pitfalls when exiting your business, working closely with a CEPA or business coach can save you a lot of grief in the end.
This article was written by and represents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in new tab) or with FINRA (opens in new tab).
