BY RICHARD KLUSKA
Twenty-five years ago I read the book “The E Myth: Why Most Small Businesses Don’t Work and What to Do About It” by Michael E. Gerber. It was a book that changed my business life forever.
If you are in the small group of small business survivors that have endured the many trials and tribulations of a business owner’s life, including managing revenues, staff, clients, banks and work-life balance, you know how difficult it can be.
After running a successful business, you might be asking: “What is the best method to monetize my business?” or in other words, how do I convert the value of my business (that is vulnerable to all stakeholders’ requirements) to personal after-tax income and net worth?
While there is no one way to monetize your business value, there are general pathways to follow that provide an improved outcome in this process.
While working with many business owners, we have identified many questions that should be reviewed before monetizing or selling a business. I’d like to share them.
Why are you selling?
Is it because:
- There’s a market opportunity to maximize a sale price to a third party?
- You want to transfer your business to the next generation (and does the next generation want it?)
- It’s time…there are other things to do?
- You’re fed up frustrated, exhausted?
- You need to fund your retirement?
- There are health reasons?
How will you value your business?
There are multiple ways to do this. However, even a valuation completed by a Chartered Business Valuator will note that the value of any business is what a knowledgeable third party would be willing to pay for the business, or in short, what will the market be willing to pay.
There are many impacts to valuation, including:
- a unique value proposition or product that has strong market potential (mostly technology- based)
- emerging industry or established industry and barriers to entry and/or exit
- proven sales volumes and growth trajectory
- consistent “normalized” profits with continued earnings growth
- a proven management team (in addition to existing shareholders) that demonstrates the business values are based on corporate goodwill and not personal goodwill.
Sale transaction and tax considerations
- Is this a domestic or international buyer?
- Is this a private or public company buyer?
- Is this a share sale or asset sale with tax impact to your net sale price?
If a share sale:
- Use capital gains exemption or exemptions with family members
- Know if your shares qualify for the exemption over the past 24 months.
If an asset sale, give consideration to :
- credit facilities and discharge of personal guarantees
- employee severances
- leases and contract.
- earn-out requirements
- vendor take-back requirements
- a requirement to be retained as an executive (can you be an employee of your own firm?).
Depending on the complexity and value of the transaction, you must surround yourself with experts in the area of:
Accounting/Finance – how to complete the due diligence that will be required in the optimal manner.
Tax: It is critical to optimize your AFTER TAX monetization value, not just your pre-tax sale value. Sometimes this takes time to prepare for the transaction.
Legal: A lawyer specializing in corporate/security law is required to ensure that all legal aspects of the transaction are examined including representation and warranties, etc.
An investment banker or broker may be needed depending on the method of “auctioning” your company and obtaining the best market penetration.
Some post-exit considerations
- What is your next purpose after the business? (Remember, if you retire at age 65, there are approximately 10,000 days for you to fill based on average mortality.)
- How will you allocate proceeds to family members over your lifetime or estate in the most tax effective manner?
- How will you achieve balance?
- How will you enjoy life to the fullest?
The monetizing of your corporate value is a key event that takes time to plan and orchestrate carefully. Hiring your leadership team of advisors is critical to ensure that your pre-sale checklist is marked off to ensure the best after-tax value with optimal sale condition.
Richard Kluska, CIM® is CEO, Director of Family Office, IP Private Wealth