If you are a business owner, selling your business will most likely be the most impactful financial decision in your life. Deciding when to sell is difficult. Below, we have outlined some reasons why selling now may be the right move for you.
Currently, the combination of the overall economy, favorable tax rates, and the low interest-rate environment have created a good time for business owners to consider selling. After experiencing several tough years starting in the late 2000s, many businesses are starting to perform well. Less balance sheet debt and increased profitability are common in the business community. Selling when things are going well can be difficult for business owners to grasp, but a business heading in the right direction will attract more buyers and ultimately fetch a higher price. Business owners often think, “My business is just starting to gain real momentum, and I want to reap the reward of any future growth.” In a perfect world, your business would continue to grow every year, but realistically businesses will either plateau or may even start to decline at some point.While income and long-term capital gains tax rates for high income earners have increased modestly over the past few years, they are still relatively low. There
is a good chance tax rates will continue to climb, which could significantly impact the net proceeds you receive from selling your business
Over the past several years, institutional banks have been more willing to provide low interest rate loans to buyers. The Small Business Administration (SBA) has also increased the minimum dollar amount for loans that it will guarantee. This has allowed buyers to borrow more funds to purchase businesses, which can increase the amount of money the seller will get when the transaction closes. In addition, private equity firms have a significant amount of capital in their “war chests,” and they are aggressively looking to put that capital to work. This means higher multiples for attractive businesses in the middle market.
THE IMPENDING “BABY BOOMER” EFFECT
Baby boomers begin to turn 69 in 2015. The majority of small- and middle-market companies in the U.S. are still owned by baby boomers. Over the next 5-10 years, there will inevitably be a tremendous influx of businesses for sale as these boomers retire or pass away. As more and more businesses go up for sale, it will become more of a buyer’s market and purchase prices may begin to drop. It may be wise to get out now before the market is overflowing with businesses for sale.
BUSINESS OWNERSHIP RISKS
Any business owner can tell you that business ownership is fraught with risks. Businesses can be negatively impacted by any number of issues. Many of these issues are out of the owner’s control. While your business may be flying high today, an event causing the economy to crash, a natural disaster, or a sudden health issue can cause a business to go into decline quickly. In addition, there is always the chance that a new technology or a new competitor could enter the market, which could hamper your business’ growth.
Whether you ultimately decide to sell your business now or later, understanding where you stand financially from a business and personal perspective is paramount to determining your options.At BWFA, we recommend that business owners have a comprehensive personal financial plan performed along with a business valuation. The business valuation will indicate an approximate amount the owner will receive from a sale, and a personal financial plan will indicate how the sale proceeds will impact your retirement and your estate.