Have you recently received unsolicited interest from someone looking to buy your business? While selling your business may never have crossed your mind before, it could be the right decision for you and your company’s future.
CPAs are frequently contacted by clients indicating that someone has reached out about purchasing their business. Whether a broker representing a company or the direct company itself, someone has inquired about purchasing their business and the owner is stuck trying to decide what to do next.
If you’re a business owner that has had someone reach out about purchasing your company, you may feel overwhelmed or confused about where to start. Assuming the prospective buyer is legitimate, there are some additional areas to consider; like emotional return, target value, and market value.
Here are three questions to help owners that have received an unsolicited interest to buy their business.
Do you love the work you do?
They say if you do what you love, you’ll never work a day in your life. If you receive a lot of emotional return from the work you do, it can make it difficult to sell the business. Moreover, this personal gratification is hard to quantify, which can affect how you value your business versus how the prospective buyer values it.
As you start to think about selling your business, think about the satisfaction it gives you outside of financial rewards. These other, non-monetary forms of satisfaction could include:
- Leaving a legacy: Many owners see their business as a representation of themselves. Leaving a “lasting legacy” through your business may be worth more than any monetary compensation.
- Ability to help the family: Business owners, especially family-owned, tend to hire family members. When you sell the business, the new owner has control over hiring decisions, which could affect the job security of family members currently working for the company.
- Ability to help the community: Community involvement and activism is a focus for many businesses and can provide emotional value far greater than the time or money donated. It’s important to consider the community impact that selling your business could have, for yourself and others involved.
Many owners struggle with the idea of selling their business. Some compare it to selling one of their children. The emotional satisfaction you receive isn’t measurable in dollars and cents, and the potential buyer may not share the same appreciation that you do.
Therefore, these non-monetary gratification sources need to be considered when you contemplate selling your business, and you need to decide if they can be found through other avenues.
What are your financial needs?
Many owners say they would sell their business “for the right price.” Well, what is the right price? Do they have other sources of steady income to satisfy current and future needs? Are they interested in retaining a job for the new owner or finding another job after the sale? Are the proceeds from the sale enough to support you and your family?
Assessing your financial needs requires answering these questions and many others. The answers are not uniform and can often depend on where you are in your life. Age, location, the standard of living, and other personal and family considerations are driving forces in determining your financial needs. Whatever the responses, the important thing is that you take the time to assess your financial situation and determine how much income is needed to provide your desired lifestyle.
You can start this analysis by calculating the current total annual value received. Keep in mind that there are many other benefits that are harder to calculate, such as access to transportation, technology, travel, and professional advice commonly enjoyed by owners, as a derivative of their company activity, without additional costs.
You can quantify some of these benefits; for instance, by determining an estimated cost of a new car with ownership costs (insurance, gas maintenance). A straightforward way to quantify the current “income” can be summarized as:
Current Annual Net Salary + Benefits (e.g. health insurance) + Annual Distributions Net of Tax Payments + Cost to Replace Other “Benefits” (auto, travel, etc.) = Current Total Annual Value
Could proceeds from a sale, after paying taxes, afford an owner these required needs?
One way to determine if proceeds are enough can be to have an investment professional calculate the amount required, that when assuming an annual investment return over your estimated lifetime, you will be able to cover current and future financial needs.
Depending on your flexibility, including lifestyle changes, this calculation can determine an approximation of “the right price,” net of selling costs and taxes.
What estimate of value does the market support?
Once you have a sense of your financial needs, a determination of the company’s estimate of value can be made. The company’s CPA can offer advice regarding an estimate based on adjusted cash flows of the business, the risks inherent in the business, and the market for similarly situated business changing hands in arms-length transactions.
Conducting a market analysis is a critical step in estimating the appropriate value of your business. Because it is such an important step, it may be wise to contact a professional with experience in business valuation.
The estimate provided can then be compared to the proceeds calculated for your financial needs, to determine if the market supports a roughly equivalent value.
Handling an unsolicited interest in buying your business
Every day, owners around the world are receiving unsolicited interests in purchasing their business. Many of these owners don’t know where to start. If you’ve received interest from a legitimate buyer, then the best place to begin is by answering the questions above to assess your emotional attachment, your current and future financial needs, and the likelihood that the market would support a value comparable to your needs.
These answers can help you decide whether to take the next step in business succession. The process of selling a business can be time-consuming and distracting, so taking time to conduct a quick analysis before you start the process can help you avoid wasting valuable resources. It can also give you confidence in your decision knowing that you have not ignored the important opportunity or entered into it without proper consideration.
Rene J Zarate CPA/ABV is a Director with Rivero Gordimer Valuation & Advisory Services. He has advised many owners of small and midsized Companies with perhaps the greatest financial decision they faced. Mr. Zarate is available for consultation when that contact arrives.