The following post is an excerpt from How to Fund Ownership Transfers Using the SBA by Sherrill Stockton, head of underwriting at Live Oak Bank and David Ryan, president of Upton Financial Group, Inc. This post discusses why you should consider a few important factors and have a plan in place before you sell your business.
Before you sell your business, ask yourself an important question: “Am I ready to sell?” Some people are not. To sell a business, you need to be prepared to plan and think about what should and would happen if you did not show up to work tomorrow.
Why are owners selling?
The Q1 2018 Market Pulse Survey Report indicates that retirement continues to lead as the number one reason for selling a company (61 percent for companies valued at $1M-$2M, and 55 percent for those valued at $2M-$5M).
Because a business often represents up to 70 percent of the owner’s overall wealth, it is critical that owners take a proactive approach. Owners who succeed in harvesting the results of years of hard work will not only benefit financially on a personal level, but will have more wealth to pass on to their families in the future, as well.
The same Market Pulse Survey Report indicates that business owners who sold their business for $2M-$5M preplanned at twice the rate of business owners selling in the $1M-$2M range. Planning is important and the better planned you are, the better results you typically will have.
If you are ready to sell, determine how much money you will need to receive for your business to be able to live the life you want afterward. Think about the following questions before you sell: What do I have now, and what do I need? Most people do not have their “number” figured out, but with a little work, you can get there quickly. Seek professional assistance from a wealth manager or financial planner to fine-tune that number before you sell.
Next, figure out the approximate value of your business by working with an experienced business broker or valuation professional. If you are looking to get a realistic idea, there are scaled-down business valuations available that you can utilize. You can do this by obtaining a “desktop” or limited report from a valuation expert with experience in SBA-backed lending. Utilizing the SBA 7(a) program can help provide a larger pool of qualified buyers, which very often results in obtaining a higher price for the business. For more information on this, check out our blog post titled, “Funding Ownership Transfers: Most Likely Buyers of Businesses.”
It’s a good idea to have a professional determine the value of your business before you sell, if for no other reason than to compare to it to the number you need to comfortably retire. Just remember that when you decide to sell your business, a bank will need its own independent valuation to ensure it is objective.
Make sure that you start talking to a knowledgeable SBA lender early on in the transaction so you understand some of the bright-line eligibility issues. You must understand what can and cannot be done from a structural standpoint before you sell. When parties negotiate these types of transactions, there’s a lot of emotion involved. Chances are you will haggle back and forth to come to an agreement.
If you haven’t talked to your lender prior to the deal, you may be structuring your transaction with components that don’t work with SBA financing. If that happens, your lender may say, for example, “We have to unravel what you’ve done here and this earn-out is not allowed,” or, as the seller, you might want to stay on for two years to help with the transition. SBA only allows a seller to stay on in a significant role for no longer than a 12-month period. As you’re negotiating, go over any drafts of documents you’re preparing before everybody agonizes over the final deal. It’s not fun for either party to have to go back to the other and say, “We have to negotiate this again.” This tends to lead to what is known as “deal fatigue,” which can be a major factor in a deal falling apart.
To learn more about the SBA program, download the new book titled How to Fund Ownership Transfers Using the SBA, coauthored by Sherrill Stockton, head of underwriting at Live Oak Bank and David Ryan, president of Upton Financial Group, Inc.
To learn more about Live Oak Bank’s mergers and acquisitions financing team, visit our website.