Recent market strength has increased the value of many small businesses. Increased values often bring succession planning to the forefront as owners see opportunity to cash out when their business value is at or nearing a peak. If a business is sold, then the challenge becomes what to do with the proceeds.
There are many ways a business can be sold. Two that come to mind are selling the entire business and receiving a lump sum or selling the business in phases, securing payment over several years. Choosing which is best might be a reflection of the business’ maturity and/or where the owner may be in his or her career cycle. Consideration must also be given to the type of business and how business cycles influence valuations. Said differently, if the value has peaked and is significant, an owner may elect to cash out regardless of where they are in their career cycle.
When considering a lump sum, a business owner should reflect on whether he or she wants to stay involved and how that might influence the value. A buyer might be willing to pay more if the person primarily responsible for growing the business and customer acquisition remains engaged for some period of time. Some other thoughts to consider: Can the business be sold for a greater value if sold to current employees? How would this type of transaction be funded and can it be structured to satisfy both the current and new owner(s)? Employees may or may not have access to sufficient cash and might need to rely on the business to provide funding through salaries, bonus and profit sharing. Can the business sustain healthy cash flows over a sufficient number of years to facilitate this type of ownership transfer and does this lengthier approach coincide with the seller’s plans? These are just a few of the many factors to consider when structuring the components of selling a business.
Take it one step further, once sold, how and when will you invest the proceeds? Selling an entire business and the subsequent proceeds can present greater challenges than a phased approach. Assuming the current market strength and economic improvement made the business more valuable, those same factors most likely have increased the value of other investments. Higher valuations for alternative investments should prompt waiting for a market correction or maybe the bottom of a business cycle before investing the proceeds. Receiving proceeds over the course of several years makes reinvesting the proceeds easier. Phased receipt of proceeds forces delay and provides additional historical insight on market and economic cycles facilitating better informed decisions.
To conclude, make every attempt to structure the sale of a business to suit the seller’s preferences. Always consider how compelling the value is when deciding whether a lump sum or phased payment approach is best. When a business is sold and the proceeds received, be patient and reflect on how best to reinvest.