When Should You Sell or Transition Ownership of Your Business?

When Should You Sell or Transition Ownership of Your Business?

It’s never a simple decision. Here are some considerations to weigh before you decide if it’s time for an exit.

Business owners decide to sell their businesses for a variety of reasons, including to fund a long-planned retirement. They may receive an unsolicited offer, see a favorable change in market conditions, experience a life change—loss of a partner, declining health—or dozens of other reasons. And while it’s not necessary to check a specific number of boxes (or one particular box), an important part of this decision is weighing the factors that loom large for you, as the owner.

“Selling a business is, of course, a financial decision—but it’s also highly personal,” says Jeffrey Winick, Senior Wealth Strategist at Regions Private Wealth Management.

Is now the right time to sell your business? Before you make a decision, here are some things to think about.

Why Sell Your Business?

For some business owners, retirement is a clear-cut target with an ideal date for a transition plan. For others, retirement is best accomplished in stages. Some may find a way to stay connected to the business while giving up oversight of day-to-day operations. However you define retirement, timing and your vision of what it looks like can influence the decision to sell, or vice versa.

Are you ready to retire (or something close)? The following factors might influence your decision:

  • The business is going strong. For some business owners, the right moment to sell is when the business looks the most compelling to outside interests.
  • You’re experiencing burnout. Building a business is hard work, and when that process takes its toll, it may be time to think about an exit strategy.
  • You’re ready to move on. This factor could be a corollary to retirement or burnout, but you may be ready to sell when you spot another opportunity you consider a better option for your focus going forward.
  • You get an offer you can’t refuse. Other owners are often looking for their own new opportunities—including private equity prospects—so a bid for your business could be just the signal you’ve been waiting for.

This is by no means a complete list of reasons a business owner might be inspired to look for an exit, but it can help clarify what could likely be a lengthy decision-making process.

Putting the Decision in a Bigger Context

A privately owned company is more than just an investment. For many business owners, it represents a lifetime of work. That’s why it’s important to consider how selling your business will align with your career or retirement goals, as well as how much of your personal wealth is tied up in the business. It can also be beneficial to ask yourself how a sale might affect other stakeholders, not just family, partners and employees but vendors, customers and even your community.

These considerations might seem subjective, but sometimes they can be more important than financial considerations. “You may have received what seems like an incredible unsolicited offer to sell your company, and there may be many reasons you rationalize to sell the company, but if you’re a true entrepreneur who still has vision, the better option might very well be to hold it and grow it,” Winick says. “Conversely, it could be an inopportune time from a commercial standpoint to sell the company, but some extraordinary personal issue might make it the right moment.”

That can require some soul-searching, so it might make sense to look to your Wealth Advisor to help you reflect and reassess your goals so you can use them to help you make specific financial decisions. “Our Wealth Advisors often ask a lot of open-ended questions to help get business owners talking about themselves, their family, key employees and the dynamics involved,” says Winick. “What obstacles have they overcome? What factors have contributed most to business success? How connected are their core values to the culture of their company, and how important is it to maintain that culture following any transition?”

Run the Numbers Like a Pro

Just as you might use different types of analyses to assist in making any business decision, you can do the same when transitioning a business.

Winick says, “Once our Wealth Advisors have completed a discovery process gathering financial and other pertinent information, they focus on helping clients prioritize goals for different aspects of life. Working with our Planning Group, and a strategist like myself when needed, we create models of various scenarios. We compare anticipated future living expenses with financial resources to determine the probability of success in attaining your goals.”

This analysis often provides a clearer picture of the financial ramifications of selling a business based on timing and the equity needed to maintain a certain lifestyle during the next phase of life. “Modeling gives people the confidence that they can retire,” says Winick. “It can be rewarding to help a business owner determine they have the financial resources and business equity needed to retire with confidence.”

Depending on what you need and when you need it will also affect the structure of any deal. An owner who needs immediate liquidity, for instance, may opt for a leveraged recapitalization or accept a minority equity investment from a private equity fund specializing in such transactions. These options can provide for a staged exit in which an owner can continue owning the company while reducing day-to-day responsibilities or grooming a successor. “That lets an owner have some liquidity while continuing to do what he or she loves, and potentially keep participating in the upside and growth of the business,” Winick says.

Family Matters

Family, whether involved in the business or not, can present a thicket of complexity that’s best handled with open, honest communication. “The sky’s the limit on the issues that can come up with family businesses,” Winick says. “Having regular family meetings and keeping everybody up to date can help prevent disappointment and misunderstandings.”

Including your spouse in conversations about potential business transitions might allow him or her to better understand that retirement may have to wait a few years to capture the benefit of a cyclical industry upturn, or allow an adult child enough time to get more business experience before beginning a transition period leading to full responsibility.

Taking the time to self-reflect, think through what different options might look like and strategically getting the family involved ahead of time can help prevent unnecessary strife down the line. Winick says that if the first time a family member hears about a parent’s business transition plan is through the parent’s estate plan following death, it is often a red flag of potential disharmony and complications to follow that could have been avoided with lifetime planning.

Considering Business Stakeholders

Business partners, too, can create complications with timing an exit, particularly if there are discrepancies in age, life goals and talent. “If you have a realistic viewpoint of what you contribute and what your partners do, you can think in terms of how to replace the loss of that relationship,” Winick says. “In particular because business partners often have complementary talents and strengths.”

Employees are another consideration. For an owner who doesn’t have a next generation willing or able to take over the business, one option is to put together a capable management team to buy out an owner. Alternatively, an owner can transition ownership to an Employee Stock Ownership Plan (ESOP), in which an owner’s shares are purchased through a trust created for the benefit of the company’s employees. This can often be accomplished on a tax favorable basis using bank financing, tax-deductible dollars from company contributions or plan borrowings, and if specific requirements are met, with deferral of otherwise reportable capital gains by the selling owner.

“If there is not a next generation, options for an outside sale or merger are limited, and the answer to the question, ‘Could the employees run the company without you?’ is yes, an ESOP can be a great way to reward loyalty and keep the legacy you’ve built so it continues on,” Winick says.

Lay the Groundwork

Preparing to sell a business is often all about maximizing its value ahead of time, so the strategies you use to grow your company can have a tremendous impact on the best time to sell. If, for instance, you invest heavily in expansion, you may need to see some of that investment pay off before you can expect to achieve peak valuation. Conversely, you may conclude that further investment doesn’t fit into your long-term plans, so a sale sooner than later may be the better strategic decision.

“Doing an internal preparedness review can determine readiness,” says Winick. “Does your company’s capital structure maximize value? Will its strategy drive growth for the foreseeable future? Is its management structure capable of adapting to new realities?” These are the types of questions best posed by a mergers and acquisitions (M&A) advisor, which is why our Private Wealth Management Team often works closely with our Capital Markets Group, which has credentialed individuals within that specialty.

One key to maximizing your company’s valuation is understanding what drives value in the first place. “Regardless of what a business owner may want the exit to look like, it’s important to be building, identifying and developing value drivers,” Winick says.

Specific drivers depend on the individual business and can include market share, customer relationships, scalability, unique products or brand recognition. “Drivers offer some sort of competitive advantage in operations or products, whether it’s a better product or service or lower cost,” he explains. These are the areas where investment can often create the biggest returns. Winick sometimes consults with another fellow strategist, Dennis Tygart, who has taken a special interest in value drivers as part of overall planning for companies working with Regions’ Capital Markets Group.

Assemble Your Team

Selling a business is not a decision best made in isolation. Putting together the right team of advisors can be one of the first and most important steps in selling your business. Taking a team approach can often reveal essential questions you should ask yourself before you pull the trigger on a sale.

While timing can sometimes be beyond your control, one thing is certain: The sooner you gather a team around you, the better equipped you’ll be to respond to contingencies. “For most business owners, selling can be a once in a lifetime event, so it’s critical to assemble a team of trusted, respected advisors with functional expertise to guide you through the process,” says Winick. This may include your commercial banking relationship manager, Wealth Advisor and accompanying core team as well as specialists who can add value. This should also include your accountant or CPA, business transactional and estate planning attorneys, M&A advisor and, when appropriate, key members of your management team.

Trust and rapport are critical, especially as you turn to them for one of the most important decisions in your business life. This group should include people with whom you have long-term relationships, if possible. “Working with advisors with whom you have a relationship that goes back years in advance of actually selling the company can often be very helpful,” Winick says. From Winick’s experience working with different Regions M&A advisors, he says, “the earlier a business has a discussion with one of our M&A advisors to understand what the process looks like and what he or she needs to be doing in the business to prepare for a sale process, the higher the probability of attaining an outcome that meets or exceeds expectations.”

Timing for the sale of a business can depend on numerous factors, so setting your priorities can be an essential first step to knowing which opportunities are worth pursuing and which are best left on the table.

Three Things to Do

  1. Listen to our podcast on the pros and cons of selling your business vs. succession.
  2. Make sure your estate plan ensures a smooth transfer of your business interests to your heirs.
  3. Consider these other big challenges that you should discuss with your banking relationship manager.