Retiring? Get the Biggest Bang for Your Buck

For many small business owners, retirement often means selling your business. Since your business is usually your largest asset, privately held business owners should include the sale of their business in their financial planning. If the sale is well planned and conducted, many advantages can be reaped from the preparation.

Any plan to sell your business should begin with your company's financial statements. While the purchase price for each particular business will always remain a mysterious multiple of net assets, revenues generated, industry standards and the financial climate at the time of sale, sellers can be certain that their financial statements will be closely scrutinized. Buyers will be particularly interested in the revenues that are being generated by your company. Sellers who are considering selling their business within the next few years should carefully review their financial statements and cautiously consider implementation of any programs that are not likely to produce a tangible return prior to the time of their anticipated sale. If you believe that there is significant value in your company that is not reflected in your financial statements, be prepared to explain that value to potential buyers.

The price received for your business may also be maximized by ensuring that your ownership in your assets is protected. Businesses with large investments in intellectual property should review their property to ensure that it is properly licensed or owned. If your business is based on the use of certain patents, ensure that patents have been obtained and that the licenses are properly documented. If your business is based on the value associated with your name or other trademark, ensure that you have obtained all the rights to use the marks in which you are creating value. The value of other businesses may chiefly reside in the knowledge and services being provided by certain key employees. These businesses should carefully consider obtaining employment contracts and covenants not to compete from key employees.

Another essential element to a cohesive plan to sell your business is to decide how to market your business to potential buyers. For certain industries, such as oil and gas service businesses, investment bankers may be able to assist in locating buyers. While the use of such professionals can provide invaluable assistance in bringing buyers and sellers together, sellers should ensure that the professional has the appropriate credentials and any licenses that may be required for the services being performed. The terms of any compensation arrangements should also be carefully reviewed.

Once a buyer has been located, the way your sale is structured can dramatically impact how much money will actually be deposited to your accounts versus how much is paid in taxes or withheld to cover the cost of future liabilities. For example, whether you sell the stock of your company versus the assets of your company not only impacts your future liability after you no longer own the business, but also effects your tax liability. In determining the true value of the purchase price being offered, the seller should consider the tax ramifications of the structure being proposed and whether or not an alternative structure might net the seller more proceeds.

Many things may also be done in the transaction to set up future sources of income for the seller. For example, if the business involves significant real estate, sellers may elect to lease the property to the new owner with an option for the new owner to buy the property at some point in the future. This technique allows the seller to continue to have a source of income after the sale. Another method that allows sellers to continue to have a source of income after the sale, is to enter into a consulting or employment agreement with the buyer. Most businesses will continue to need the assistance of the seller for at least some transitional period while new management is brought up to speed. Other businesses may elect to have the seller continue as an employee of the business usually in the same or similar role previously performed by the seller based on an agreed salary. Finally, a portion of the purchase price may be paid out over a number of years rather than being paid at closing. Each of these techniques has a common weakness in that buyers may default on leases, terminate employment agreements or become unable to pay the portion of the purchase price that is deferred. Sellers should weigh their need for a continuing source of income against the risk of default.

Equally important is the future liability that may linger on once the business has been sold. Sellers often prefer to sell the stock of their business because the liabilities associated with the continued operation will remain with the business itself. Buyers, by contrast, often favor purchases of assets so that they determine exactly what liabilities will be assumed and what liabilities will be retained. Whichever structure is ultimately selected, this area is certain to be the heavily negotiated. Buyers will often want a period of time after the sale during which the seller will remain responsible for liabilities that occurred during the seller's ownership, but do not arise or are not discovered until after the sale. Seller's may agree to indemnify the buyer against these types of liabilities, but want a limit on the amount of time during which they will be liable as well as how much they have liability to provide. This is particularly true with sellers who are transitioning out of the business through retirement. Sellers will often hold a portion of the money received from the sale in liquid funds in order to be able to cover the costs of any such problems that may arise in the future. Sellers seek to limit these amount so that they may begin investing their proceeds more freely as soon as possible.

Like any other aspect of retirement planning, the amount received from the sale will be influenced and can be increased by careful planning and preparation. Begin planning for your sale now and the process will be much more rewarding when it is completed.