In honor of Small Business Month, we salute the vital role that business owners play in our country. Small businesses, or companies with less than 500 employees, made up over 40% of the nation’s GDP as of 2014, according to the U.S. Small Business Administration Office of Advocacy. In terms of job creation, according to the Business Employment Dynamics from the Bureau of Labor Statistics and Office of Advocacy, for the 2000 to 2019 period, small businesses created almost twice as many jobs, 10.5 million, versus large corporations, which added 5.6 million jobs.
While many companies were hard hit by the economic shutdown during the pandemic, we have seen encouraging signs of entrepreneurial spirit and resiliency as the country continues to reopen and recover. Challenging times reinforce the importance of business planning for both the expected and the unexpected. As you look to the future, you may be contemplating your next steps, professionally and personally. Choices may include transitioning your business to the next generation, structuring a management buyout, seeking an outright sale, or weighing some combination of these. Planning ahead can make the process much smoother, appropriately set expectations, and avoid potential conflict. Here are five pre- and post-transaction issues to consider:
1) How much do you need? The bulk of your net worth may be tied up in your company. If you are thinking of a full retirement, what will you need post-transaction to achieve your goals and live comfortably through retirement? This may partially drive what you decide to do with your business.
2) “Internal” and “External” sales can be very different. Different transaction scenarios can have widely varying financial implications. An “internal” sale, can mean selling to the next generation, to key management executives, or to a larger set of employees. These deals often result in a lower valuation than an external outright sale. Finding a strategic private investor (externally) may result in the highest price, but you may still be tied to the company (depending on deal structure) when you are ready to pursue new ventures or just relax in retirement.
3) Understand what you are really getting. From a financial viewpoint, you want to receive the best possible price for an asset you have devoted considerable time and energy to making successful. But remember the impact that taxes, legal fees, and other transaction-related expenses may have. These costs may vary greatly depending on the type of transaction and how it is structured. They are usually significant enough to warrant in-depth consideration throughout the decision process.
4) Emotions matter too. Non-financial issues are also important to factor into your decision. Is it important that the business stays in the family? Do you still want to play a role in the company going forward? Do you have ideas for what you will do post-transaction? Clearly answering these questions well in advance may help determine your ultimate direction.
5) Have a post-transaction wealth strategy. If you do proceed with a transaction, you will likely receive a substantial amount of liquid funds. Identifying your goals, setting your asset allocation, and constructing a customized portfolio can help you reach your goals. These can include everything from asset growth expectations, wealth preservation timelines, and other legacy targets.