When is the right time to sell your business?
Trying to time the sale of your business based on the stock market’s performance is futile. You cannot successfully predict market trends to maximize the value of your business. Therefore, relying on such variables to decide when to sell your business is impractical. Instead, it would be best if you focused on other factors that have a more direct impact on your business’s value.
There are several factors to consider when answering this question. One way to approach it is by examining your timeline, including questions such as:
- At what age do you envision yourself fully exiting your business?
- What are your plans and goals after selling your business?
- How much money do you need from selling your business to finance your next [ad]venture?
By answering these questions, you can better plan and prepare for the future and ensure a smooth transition out of your business when the time comes.
Timeline to Sell Your Business
Say you are 51 years old and want to be entirely out of your business and on the beach by age 58. Well, know that you will need about a 1 to 3-year window during which you work as an employee of the company that buys your business in what is called an “earnout.”
An earnout is a contractual agreement in which the seller of a business agrees to work as an employee or consultant for the buyer for a specific period to achieve particular objectives. In return, the buyer pays the rest of the sale price. This earnout helps ensure that the seller’s interests and goals align with the buyer’s and that the business continues to perform well after acquisition. The duration of the earnout period is determined by various vital factors, such as the size and complexity of the company, industry dynamics, the acquirer’s risk appetite, and exit strategy planning.
The duration of the earnout period can vary significantly based on these factors, and we’ll help you navigate them to ensure a fair and favorable outcome for all parties involved. Typically, the average earnout period in America is three years. Still, it can be as short as two weeks or as long as five years. Keep in mind that you can shorten the earnout period by taking steps to de-risk the business and reduce its dependence on the seller’s involvement for its success.
It could also be a longer earnout, such as in a professional service business like a dental practice or an advertising agency – it could be as long as five years. So, it is safe to budget a 3-year earnout window.
So if you are 51, want to be on the beach by 58, and know you have a 3-year earnout, you must accept and sign a purchase agreement by age 55.
It will take about six months to a year to negotiate and execute the sale of your business. Again, it could be shorter or longer, but a safe budget is about 6-12 months to complete the sale. So now you have to back-time another year to factor in the time it takes to negotiate. Now, you will be 54 by the time you decide to go ahead and sell your business.
So again, if you are 51 today, you now know that you have got three years to get the business ideally situated to go to market before you hit the age you need to start the selling process – you’ve got a 3-year window to work with if you know you want to be on the beach by 58.
Retire On The Sale Of Your Business
Another way to think about the question “when to sell your business” is when your business is worth enough so that you can sell it to live the rest of your life comfortably without having to work. You can look at how to calculate your wealth gap to get a better handle on what your business needs to sell for to retire.
Most financial advisors/planners will tell you you can withdraw about 3% – 4% of your cash or stock market investment portfolio each year. So if you’ve got $1,000,000 in the bank and you’re withdrawing about 4%, that equates to $40,000 per year in income. And then, you can back that into what you think you need in retirement income for what you need to make on the sale of your business.
Take our free Freedom Score Assessment to help determine what you need to sell your business to retire.
If you’re considering selling your business, it’s essential to determine how much it needs to be worth to meet your financial requirements. One method to calculate this is to decide on your annual income requirements and multiply that by 25. This will give you an estimated amount of after-tax proceeds that you would need from the sale of your business. However, it’s critical to remember that several frictional costs are associated with selling a business, such as taxes, legal fees, brokerage fees, and other expenses that can impact your after-tax take. To ensure you receive the maximum after-tax benefit, it’s essential to seek a tax opinion from a financial expert who can help you navigate the tax implications. Investing in other investment opportunities after exiting your business is critical. Ultimately, it’s crucial to think beyond just the sale price of your business and focus on the amount of after-tax dollars you need to achieve your financial goals. By doing so, you can confidently move forward with the sale of your business and plan for your financial future.
Your Walkaway Number
When it comes to making a deal or selling something, it can be helpful to establish a strategy that determines the maximum amount of money you would be willing to accept in exchange. This is known as your “walkaway number.” Your walkaway number is the highest amount of money you would accept in a given situation – the point at which you would hand over the keys or sign on the dotted line without hesitation. To determine your walkaway number, imagine someone offering you a blank check and asking what amount it would take for you to sell or hand over your possession right away. By answering this question, you can arrive at your walkaway number and use it as a guide for future negotiations or deals.