Most business owners mistakenly believe that they should only sell their business when they are ready to retire. While that is certainly one option, the option of staying on in a management role or part-owner after selling a business is just as viable and perhaps the better option in today business marketplace.
I would estimate that more than 50% of the time when we talk with business owners regarding the potential sale of their business they say I am not ready to retire for a couple years, call me back then. The simple truth is that selling a business a couple years before the owner is ready to either retire or work part-time is the perfect time to sell a business, particularly if the goal is to maximize the sale price. The reason for this is simple. Probably the biggest risk associated with acquiring an existing business is the potential loss of customers, employees and organizational knowledge that can result when a long time owner of a business retires. This major risk can be minimized if the seller is willing to stay on with new ownership as a shareholder, managerial position, employee or consultant. The mitigation of this single biggest acquisition risk factor should translate to a significantly better price for the seller. Factor in to this financial benefit that most people are living longer lives these days; it would also make financial sense to delay and minimize the reduction of retirement savings by continuing to work until it is no longer practical or desirable.
Often it is even possible for the owner of a business to sell the business and retain either a shareholder position in the new company or include an earn-out provision (similar to a royalty) in the purchase agreement. In the first case, the seller would stand to receive additional proceeds from the business when selling stock shares at retirement or when the business sells again in the future. In the case of an earn-out, the seller could continue to receive an additional income stream from the business for the term of the earn-out. In either case, the seller stands to have a second pay-day and benefit from the infusion of capital and resources into the company by the new owner. Of course, during this time period, the seller would also be receiving income and potentially other compensation benefits as negotiated in the employment or consulting agreement.
Many business owners also worry about changes to company culture after an acquisition. Understandably, most business owners have grown very accustomed to making their own work hours, decisions and being accountable only to themselves. However, new ownership does not have to mean a change in culture or work environment. Most investors and companies that invest significant money and acquire businesses realize that a critical aspect of acquiring a company is to not change the company culture or work environment for at least a year or more while they gain a strong understanding of the company culture, business model and value drivers. Being a key employee in a new company also gives the seller a fair amount of leverage to influence and help ensure that critical parts of the company culture and environment that have led to success, satisfied customers and employees, continues under new ownership.
Selling a business when the owner is still willing and able to work in the business presents an opportunity for business owners to directly influence the market value of their business with some simple planning and help facilitate a successful transition.
Author: Edward L. Fixen is an Accredited Business Appraiser (AIBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm in California.