Protecting your assets
Business Owners: Don’t Take That Great Offer Until You Understand These Two Things
Protecting your assets
Business Owners: Don’t Take That Great Offer Until You Understand These Two Things
Small-business owners often accept an offer to buy the business without having a realistic idea of what their post-exit financial situation will really look like.
How much is your business worth? Business transactions usually hinge on that question, but the answer may be less straightforward than you think. An offer that sounds enticing can leave you in a financial position far removed from the comfortable lifestyle you anticipate.
Sure, you know what the letter of intent says—and that’s a lot of money! It may be a reasonable offer and, objectively speaking, a lot of money, but taking the deal still may not work out to your advantage. So, if it’s not the selling price, how can you be sure you’re making a decision that delivers the payoff you’ve worked for all these years?
Two data points are crucial to getting it right, and if they don’t play together nicely, then you’ll almost certainly regret signing on the dotted line.
Piece of cake, right? Not really.
In over two decades of practice as a financial advisor, I’ve seen many small-business owners who can’t accurately gauge their living expenses. Honestly, few people have a solid grip on this basic information, but it’s especially tricky for business owners because they tend to run so many of their personal expenses through the business.
Unwrapping your true living expenses—what it would cost you to change nothing in your daily life except your status as a business owner—is really hard. That’s due in part to the fact that you probably don’t even recognize all the expenses that your business subsidizes. I’m not talking about tax fraud, but rather all the little things that just make more sense to handle through the business rather than standing separately.
The list goes on and on, and it’s almost impossible to think of all the stuff your business pays for until you’re paying for it yourself. The upshot is that after selling a business, living expenses (and taxes) almost inevitably spike up much higher than owners anticipated.
That letter of intent to buy your business may look lucrative on paper, but in the context of your true lifestyle costs, the final details of the transaction may make it a financial setback you’d do well to avoid. Unless it’s an all-cash offer, which is quite rare, you need to look carefully at how the numbers play out over time given the way the deal is structured.
Typically, I see small-business owners sell via agreements that include upfront cash and a moderate salary for the staying period, plus an earn-out amount and maybe private equity stock. The numbers may add up to a fine total, but they can also represent a severe lifestyle hit.
If your salary doesn’t cover your lifestyle (and it probably won’t—remember all those surprise expenses?), then you will wind up having to subsidize your income with the upfront cash you received in the deal. As a result, when your contract and/or earnout period concludes,
None of these scenarios are what you had in mind when you agreed to sell! How could your “great offer” have left you in such a terrible position?
Here’s the thing. A great offer is only great if it leaves you better off than you were before you sold the business. Until you understand your true cost of living and how that will work in the context of the proposed deal’s specifics, you shouldn’t take any offer to buy your business, no matter how sweet it seems.
This article was written by Meredith Moore from Forbes and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.
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