Law News and Tips

Selling the Business

Fred Vilbig - Friday, June 02, 2017

Selling the Business

 

SELLING THE BUSINESS

Fred L. Vilbig © 2017

     I grew up in Dallas, Texas, where my grandfather owned a construction company. It was 100 years old. He had inherited it from his father, who had inherited it from his father. A family business surviving through three generations is not unheard of, it is extremely rare. Then along came my grandmother.

     When my grandfather died in 1976, his business was worth the current equivalent of almost $5 million. My grandmother could have sold the business to the highest bidder, either in a stock sale or an asset sale. However, for all of her wonderful qualities, she was not a businesswoman. She simply liquidated the assets. She sold the bulldozers, the scrapers, the maintainers, and all of the other hard assets, basically taking pennies on the dollar. She let the name and all of that built up goodwill just evaporate. I don’t know exactly what was lost, but I would estimate that it could have been as much as 75% of the value of the business.

     For many business owners, this would be an unimaginable tragedy. Since owners typically pump every available resource into their businesses, they do not have a substantial 401(k) or SEP or any other kind of retirement savings. Their business is their retirement. However, that may be a problem.

     Over the next 10 to 15 years, it is estimated that over 12 million privately owned businesses will change hands because they are owned by baby boomers. Some analysts are concerned that so many businesses for sale at one time may flood the market and depress values – good for buyers, but bad for sellers. Careful business planning is critical, but so many times, business owners are too busy to plan. That is a mistake.

     In planning to sell a business, there are a number of factors that need to be considered. First and foremost, who are your potential buyers? Sometimes inside sales can net more because the buyers are familiar with the business. Is there a family member in the business? If not, is there one or several key employees who might be interested in buying the business?

     If there is a possible inside buyer, how will they pay for it? Do they have cash? Typically, they do not. Can they get a loan? Does SBA financing work for them? Is the owner willing to take back some or all of the purchase price?

     If the inside sale doesn’t work, how do you find good third-party buyers? There may be competitors lurking around waiting to snatch up your business in order to gain a larger market share. Or, there may be individuals who are just interested in owning their own business. Trying to identify them can be a challenge. Sometimes it is best to talk to business brokers, but how do you select the best broker for your type of business?

     And then there is the question of valuation. Businesses can be valued on hard assets and/or cash flows. Some businesses can have what is called a “strategic value” to a particular buyer (for instance, a competitor who is trying to gain market share) which may be more than the strict appraised value. In any event, business owners need to be realistic in setting a price for their businesses. Many times owners overvalue their businesses. If the owner is working with a broker, the broker can help to set the value. If it is an inside sale to a family member or to one or more key employees, then the company accountant may be able to help establish a value.

     In any event, the sale of the business will have a huge impact on the business owner and his or her family. As I said, careful consideration needs to be given to all these factors. Otherwise, you could end up with a liquidation and the loss of years of hard work, like my family, and that is not a good thing.

Thinking of selling your business? Want to plan for your future?
Contact Fred now about your situation.

The first consultation is free. Or call him now at (314) 241-3963


 Check out Fred's other BLOG post on business planning. His articles: Business Planning I and Business Planning II are worth a few minutes to read. You may know many of the key points in these articles it's worth reviewing them, especially if you're planning to buy or sell a business or separate from your business partner.  

 

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