As a small-business owner, you may reach the point when you say, “Time to sell.”
Maybe your small business isn’t doing too well — or maybe it is, and you want to cash out, or you’ve decided that being an entrepreneur just isn’t for you and it’s best to quit while you’re ahead.
If you’re thinking of getting out, though, Chris Wagner has some advice: Watch your step. You can make expensive and painful mistakes if you rush into selling your small business without adequate planning, says Wagner, who has been through the process many times as director of transaction advisory at Strategic Wealth Partners. That firm, based in Ohio, provides financial consulting services to businesses and entrepreneurs.
Small-business owners’ “core competence is in their business,” Wagner tells NerdWallet. But “the sale process is unlike any business process that they’re used to. It’s just very different.”
Selling your business is obviously a tough decision, Wagner says. You probably spent years dreaming of starting your company and even longer planning and executing a strategy. And running that small business probably has consumed your life.
“Sometimes, the personal life and the business are tightly intertwined,” Wagner says. And sometimes a small-business owner decides it’s time to disentangle the two.
Wagner urges owners thinking of getting out to “do a gut check.” Ask yourself: “Do I still love what I’m doing? Do I still want to grow this business?”
“What’s really important is the passion, whether they really love and enjoy what they’re doing,” he says.
There are certainly many reasons for getting out. It could be for health reasons, or it could be triggered by the death of a founder or co-founder. Or as a small-business owner, “you’ve just run out of gas,” Wagner says.
Sometimes, it’s because the small business has become so successful. “The business has grown and becomes too challenging to manage from an operational or even a financial perspective,” Wagner says. “The numbers get bigger, especially when it comes to working capital.”
In other words, you need more money to keep going, which usually means incurring more debt. “They just start getting uncomfortable with the thought: ‘Gosh, I used to have a $200,000 line of credit. Now I have $2 million.’”
Wagner, who typically handles two or three business sale deals a year, offers these tips if you’re thinking of selling your small business.
1. Be clear about why you want to sell
You have to “really think about the motivation to sell,” because that’s an important consideration for how you go about selling, Wagner says.
For instance, if you want out because the financials are starting to get overwhelming, but you actually still have a passion for what you’re doing, you might consider selling just part of the business.
You “may not be happy selling the business and then walking away,” Wagner says. But perhaps you can find an investor to take on some of the financial burden, such as a private equity firm, he says.
In fact, doing so could make the business grow faster. Small-business owners sometimes get more conservative as their company and their individual net worth grow. They become less of a risk taker, Wagner says, and partnering with another investor could fix that.
“When you partner with a private equity firm, you start to use someone else’s money,” he says. “The entrepreneur tends to go back to being more of a risk-taker and being more aggressive in growing the business.”
2. Seek out and rely on expert advice
Selling a business can involve complicated legal and financial issues, Wagner says. The smart move is to consult with experts to deal with those matters.
He says some small-business owners who have decided to sell “just consult with their accountants,” even though those professionals have limited knowledge of and experience with mergers and acquisitions.
A small-business owner “will sell a business just once,” Wagner says. “They should reach out to experts in the field.”
3. Understand what it means for your lifestyle
Wagner says a common mistake small-business owners make is to start the process of selling the company and, six months into that, “realize that, after taxes, the valuation is not enough to walk away.”
Wagner says you must carefully assess how much capital you need to walk away from your company. Part of that, he says, is assessing your own lifestyle.
“They may be living a certain lifestyle today, but they may be living a different lifestyle when they walk away,” he adds. “That needs to sync up with the valuation and what they can get from that business in addition to whatever liquid assets they may have and what they need to retire or walk away.
“The last thing a good entrepreneur wants to do is sell a perfectly good business and then go to work for someone else.”
Of course, after considering these tips, you may not decide to sell at all, and you plan to keep running your small business. In that case, check out NerdWallet’s Small Business Guide for more advice. For free, personalized answers to questions about starting and financing a business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
Top image via iStock. Wagner photo courtesy of Chris Wagner.