You’ve spent years building your business, working towards an exit and now the time has finally come. Someone has made you an offer you can’t refuse… But, without fail, nearly every business owner that has been through a sale event would approach things differently if they were able to repeat it. So, I am sharing some of the most common mistakes made when selling a business, to ensure you’re financially prepared for sale.
1. Plan ahead
Most business owners calculate the potential sale price of their business by using a multiple of profits. There are a number of other questions you should ask in addition to this though:
- How much do you actually need to live on?
- Is it going to be enough?
- Could the figure be more than you’ll ever need?
If it is the latter, you can emphasise other standards that the purchaser needs to meet rather than solely focusing on price.
There are countless considerations prior to sale, which is why cashflow modelling ahead of the event can be extremely useful. It can offer a clear concept of the level of income the proceeds of a sale might provide and the impact that any other capital expenditures or gifts you want to make might have on your long-term plan. That can then influence your understanding of exactly how much you will require from the sale to meet your personal needs. This should significantly enhance your negotiating ground as you’ll know your bottom line and you will be operating from an informed position.
2. Be mindful of inheritance tax
Remember that the shares in your business may currently benefit from business relief but the sale proceeds will form part of your estate on sale. However, there are a number of options available if IHT is important to you. Harnessing the company pension effectively and structuring the business’s shares carefully prior to sale could be vital. All too commonly these adjustments are an afterthought, which results in many entrepreneurs unnecessarily missing out.
3. Take time to work out what’s next
Most business owners seem to believe that, once they have sold their business, they’ll sail off into the sunset for forty years and enjoy life. Often though, ‘life after sale’ might come as a shock to the system. It’s going to require a significant mindset shift. For years, you’ve been working tirelessly towards something and now you’ll be drawing your money down. This is often an unwelcome reality but to enjoy your proceeds effectively this is something you may have accept.
It’s not just a financial mindset shift though – you will need to carefully consider what you’re going to spend your time doing after the sale. You’re likely a high energy individual who will want to ensure that the period after sale is liberating and enjoyable, rather than slightly disconcerting and lacklustre.
Successful entrepreneurs are also typically risk-takers. That’s usually why they’ve got to where they are and how they’ve reached a successful sale event. As a result, the first thing they often want to do is invest in another small, high-risk business. But remember, if you’ve sold (or are about to sell) your business, you’re the exception not the norm. Seventy businesses are formed every hour in the UK, but half of them will completely fail in the first five years and 99.6% will never make £10 million in turnover.
If you do want to get involved with small ventures (great!) avoid doing so with every penny you have. Ensure that at least 80% of your sale proceeds can provide for all of your spending requirements (until death) and entrust this to a professional. That way you’ll know the core of your money is in safe hands, so you can go and take as much risk as you like with the remaining 20%. If it goes wrong, it won’t materially impact your lifestyle.
So, if you’re about to sell your business, or have just sold it, don’t fall into these common traps and if you’re concerned, seek advice.
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All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.