In today’s slower economy, many business owners need help deciding whether to sell their businesses amidst a looming recession. We are not experiencing the excitement of several years back where market dynamics favored bold expansions and private equity investments.
One of the main obstacles business owners may encounter in this environment is buyer reluctance. With a recession on the horizon, buyers may be more cautious when considering a business purchase. In addition, financing constraints can limit the number of qualified buyers, making finding the right buyer for your business more challenging.
However, it’s not all doom and gloom. While private equity activity may have slowed, significant acquisitions are still happening with strategic purchasers. These buyers often seek opportunities to strengthen their market position or expand their offerings. Good buys that make sense are still in play, just not at the same frothy levels we saw a few years back.
Reasons to Sell Your Business
It’s important to note that every business owner’s situation is unique, and you should carefully consider the decision to sell. Making decisions based on timing is always risky because you can’t tell the future. However, there are legitimate reasons to sell your business, despite a forecasted recession.
Running a business can be incredibly demanding, both physically and mentally. The pressure can amplify during economic downturns, making it even more challenging. Tapped-out business owners may look to sell now to get out of the challenging economic environment.
Likewise, an owner may have reached a point where they are satisfied with their accomplishments. Selling the company can allow them to capitalize on their hard work and enjoy retirement or other interests.
Consulting with an advisor, like an investment banker or financial consultant, might reveal the timing is right to sell your business. They can assist you in navigating the intricacies of selling in times of economic slowdown.
Reasons Not to Sell Your Business
Today’s situation is different from previous periods when businesses sold at maximum value and buyers were willing to pay a premium price. Yet, the economy has a reliable track record of recovering.
If you don’t have an acute or immediate reason to sell, this could be an excellent time to focus on improving your business to increase its value. Reducing expenses, increasing profits and optimizing operations can position your business for a future sale when market conditions are more favorable.
How to Get the Best Value for Your Business
In these uncertain economic conditions, business owners must be proactive and strategic when selling their businesses. Buyers are more critical now, and being well-prepared can significantly impact the value you receive.
If you are targeting a transition within the next two to five years, now is the time to start preparing.
Read: 5 Things You Should Do Before Selling Your Business
Build Out Your Core Team
A core team comprises trusted advisors such as tax advisors, investment bankers, corporate and estate attorneys, and wealth advisors.
Involving these experts early in the selling process can proactively address any financial or legal challenges. They will help optimize your business’s financials, identify growth opportunities, and ensure that your business complies with all regulations. This level of preparation and attention to detail demonstrates to potential buyers that your company is well-managed and has a solid foundation.
Having a core team also streamlines the selling process, making it more efficient and less stressful for you as a business owner. Each member brings their unique expertise, collaborating to present your business in the best possible light and negotiate favorable terms.
Explore Transition Alternatives
During an economic downturn, business owners must explore various transition alternatives when considering selling their company. These alternatives provide options beyond a traditional sale and can address the unique challenges of slower economic times.
Strategic Acquisitions: Joining forces with another company can increase market share and access to resources, creating a stronger position in the market.
Private Equity Partnership: Unlike strategic buyers who might be equally affected by the downturn, private equity firms typically have capital reserves specifically for these opportunities.
Employee Buyouts: Selling the business to employees can preserve the company’s culture, maintain employee loyalty and ensure a smooth transition.
Family Succession: Passing the business to family members allows for continuity and preservation of legacy.
Create a Continuity Plan
Creating a continuity plan helps ensure a smooth transition of operations and mitigates risks for potential buyers. Here’s how a continuity plan can benefit you:
- Minimizes Disruption: A well-thought-out continuity plan outlines procedures and protocols to ensure that essential business functions continue seamlessly. This assures potential buyers that the business for sale will not be significantly impacted by the transition, reducing their concerns about downtime or loss of revenue.
- Preserves Relationships: A continuity plan helps maintain strong relationships with key customers, suppliers and stakeholders. By showing how you will maintain customer satisfaction and business partnerships during the transition, you reassure potential buyers.
- Mitigates Operational and Financial Risks: A thorough continuity plan identifies potential risks and provides mitigation strategies. This reassures potential buyers that they are acquiring a business with solid risk management practices, reducing uncertainties and potential financial setbacks.
- Provides Stability to Employees: A continuity plan includes strategies for successful employee retention and communication. This reassures buyers that there will be few job cuts or loss of important employees, keeping the workforce and business strong.
Proactively Review Your Tax Strategy
By carefully navigating the tax landscape, you can minimize tax liabilities and maximize your net proceeds. Here are some key considerations and potential tax implications to keep in mind:
- Consult With a Tax Professional: Engage with a qualified tax advisor specializing in business transactions. They can provide guidance tailored to your situation and help you identify tax-saving opportunities.
- Capital Gains Tax: Selling a business typically triggers capital gains tax on the profits from the sale. However, understanding the potential strategies to reduce your tax liability could create signifant savings after the transaction. Many of these strategies need to take place before the letter of intent (LOI), so giving yourself a nice runway will allow you the time to implement your plan.
- Qualified Small Business Stock (QSBS) Exclusion: If your business meets specific criteria, you may be eligible for a partial or complete exclusion of capital gains tax under the QSBS provision. This can be a valuable tax incentive to take advantage of.
- Section 1031 Exchange: Sometimes, you may consider utilizing a Section 1031 exchange to defer capital gains tax liability by reinvesting the proceeds into a similar business or real estate investment within a specified timeframe.
- Deductible Expenses: Explore potential deductions related to the sale, such as professional fees, broker commissions and transaction costs. These deductions can help lower your taxable income and optimize your overall tax position.
Set aside time to meet with your core team and tax advisor to discuss where you stand and how you can apply proactive tax strategies that could make a difference for your business.
Business Valuation Review
A business valuation review helps determine the fair market value of your business. Here’s why conducting a business valuation review is smart:
- Fair Market Value: A business valuation review accurately assesses your business’s worth based on its financial performance, assets and growth potential. This helps establish a fair asking price that aligns with market conditions, ensuring a realistic and competitive offering.
- Attracting Potential Buyers: During a downturn, potential buyers are typically more cautious and diligent in their investment decisions. A business valuation review shows the worth and potential of your business using reliable financial data. This boosts buyer confidence and makes you more likely to sell your business successfully.
- Comprehensive Analysis: A business valuation review considers various factors that impact your business’s value. This includes financial performance, industry trends, customer base, competitive landscape and growth prospects. A thorough analysis of these factors provides a holistic view of your business’s worth, allowing you to make informed decisions regarding the sale.
Get the Right Team to Help You
By being proactive in your pre-sale planning and implementing these strategies, you can increase the value of your business and position yourself for a successful sale, even in a challenging economic environment. Remember, it’s always early enough to start preparing for the future.
Download our business transition checklist.
