This article are provided for information purposes only, and are not intended as legal advice.


Planning to selling a business – do you expand the business, keep the status quo or shrink the business before you retire?

August 24th, 2009

You are planning your retirement and you have no succession plan.  As a result, you need to sell your business.  The question is when do you sell your business?  Are you planning in advance for example, do you want to retire in 1, 2 or 5 years?  If you are thinking about the future, what do you do between now and when you want to sell your business?  Do you grow your business, do you keep the status quo or do you shrink your business if it is getting too big for you to handle?  Keep in mind, the bigger the business that you have, the more profitable hopefully it will be therefore you may be able to get a higher selling price for the business.

 

If you expand the business and need to invest capital, will that decrease profits for the next few years because you need to reinvest in the business over the next 3 to 5 years?  If you increase your expenses, your profit will drop and your business will be worth less in the short term but if you hope that the profits will increase substantially in say year 5, that will take place at the time that you want to sell and you will not get the advantage of all your efforts.  Do you postpone selling your business for another 2 or 3 years so that your net  income for 3 years after your reinvestment show a higher level of profitability and are reflected in your year end financial statements?

 

If you do not reinvest in the business, will your profits be maintained or will your business shrink?  If your profits are maintained, are you happy at that level, what happens if you start to lose business because you did not reinvest in the business?  Your business will be worth less money if you do nothing.

 

This shows that you need to plan in advance of when you want to sell the business. Maybe you do something in between no reinvestment plan and some reinvestment in the business.  Will a small investment maintain the profitability of the business and ultimately the value of the business? 

 

If you know that sales will decline if you do nothing or the pay back on a reinvestment plan is too long, maybe you should sell the business now instead of waiting the 1,2 or 5 years?  Will you get more now if you sell the business today then if you waited several years?  If you took the additional amount that you would receive today, invested it for the 1 to 5 year time frame that you had for your business, will you be further ahead and have more cash than if you worked for several years and then sold the business?

 

When you look at the future you may realize that you should not wait to sell, you are better off to sell now.  On the other hand, looking into the future may force you to reinvest in the business because it will have a quick payback and by the time that you are planning to sell the business, you will get a higher price.  If you can do the reinvestment over 2 years and that will double profit in year 3 to 5, that would be a worthwhile investment.  If it took 5 years before you see any signs of higher profits, that may not be worth your while if you plan to sell the business. 

 

These examples show that you need to plan your retirement.  If you do not plan, your business could be worth a lot less than you had hoped.


Filed under: Sell a business — Gary Landa @ 7:31 pm


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