2016 was a hot year for small business sales – 7,842 transactions were closed in 2016, up 8.6% from 2015 and 4.6% from 2014, according to BizBuySell's 2016 Insight Report. According to the report, 2016 had the highest number of businesses changing hands since the report’s inception in 2007. Primary factors for the reported growth are attributed to an improving small business environment, more owners looking to sell, more qualified buyers on the market, and better financing options.
70% of business brokers attributed at least a quarter of their closed sales to Baby Boomers, according to the BizBuySell December survey and 98% expect the same amount or more to exit their businesses in 2017. While the report indicates that small business momentum will continue into the new year, there are still a number of policy issues that may impact the business transfer marketplace such as the final ruling on overtime pay, health care regulations, and tax rates.
If you’re a Baby Boomer business owner who is thinking about selling or transferring your business to someone else within the next few years, the time to start preparing is now. Here are six things you should do now to prepare for a business transfer:
- Get Your Finances in Order
Make sure your financial records are accurate and organized. You need to understand where things stand from a financial perspective so that you can make sound financial, tax, and business transition decisions. Potential buyers will want to know all of this and lots more:
- Is your business financially healthy and profitable?
- Have your books been reviewed by a CPA?
- Will your business profits grow in the future?
Lenders and buyers usually require at least three years of historical financials that consistently show good profitability and accurate reporting.
- Get a Jump on Tax Planning
Most business owners only think about taxes once a year, which means they often miss the chance to make any meaningful changes to their tax situation. For example, many owners could benefit from changing their business entity structure before they sell and this may be the opportune time to make the switch. You’ll want to discuss this with your CPA and transition advisors to get advice about this and other tax strategies that may be applicable for your personal as well as business finances.
- Determine Your Personal Goals
There are many goals, both financial and non-financial, that you should consider in order to have a successful ownership transition. Devote some serious time to your personal timeline, your ideal vision for your sale and figuring out what you want to do after you sell. This step is often overlooked by owners, which can cause remorse down the road. Most owners have spent all of their time, money, and energy on their business, and it takes time to separate your identity from your role in the business. Gradually spending more time away gives owners the time and space they need to envision themselves without their business.
- Take Stock of Your Business & Make Improvements
What kind of shape is your business in? Are you financially healthy and profitable? There are many drivers of business value beyond profits, and we discuss many of them in our “Guide to Maximizing Business Value.” Strong management, market share, reputation, quality products and services, and documented processes and procedures are just a few of the things that buyers will review when they consider whether to buy your business and how much they are willing to pay. Give your business a fresh coat of paint – both literally and figuratively -- to put it in the best light for potential buyers. Sellers pay top dollar for high quality, and it can take time and energy to prepare your business for sale.
- Diversify Assets and Save Outside the Business
Now is a great time to start diversifying your assets by investing wisely outside the business, while leaving sufficient capital in the business for possible lean times. This reduces your personal risk and lessens your dependence on the business sale proceeds. While owners often get to keep the cash they leave in their business at the time of the sale, leaving excess cash in the business is not a good idea or buyers may think that it is necessary to run the business.
- Determine the Best Business Transfer Option for You
Will you transfer your business internally to family members, employees, or key managers, or will you look to sell externally to an outside buyer? You’ll need time to understand the pro and cons and determine how much money you would net from each scenario. The decisions you make will affect your employees, your legacy, your family, and ultimately, your own future.
Make 2017 Your Year!
You want to make sure that you’re ready to sell when the time is right from a market perspective, but also from a financial and personal standpoint. Taking these six steps will take time but will go a long way toward helping you to prepare for what may be the largest financial transaction of your life. The beginning of the year is a perfect time to start your business transition planning process. Planning early will allow you to positively affect the outcome and give you a greater chance of achieving your goals.
About Business Transition Academy
Our mission at BTA is to educate owners about the benefits of planning for an eventual transition from their business. Jane Johnson offers business transition advisory services to companies with annual revenues greater than $5 million, and assists smaller businesses to prepare for their own business transition by providing free educational tools and resources. These tools can be found in our Resource Center that offers information, case studies, videos, transition guides, and more.