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. 

1. Your true living expenses.
2. The structure of the buyout agreement. 

Piece of cake, right? Not really.

Your lifestyle costs more than you realize.

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. 

• Cell phones for you and your family.
• Travel that is paid for with points earned on business credit cards.
• Use of business vehicles.
• Civic associations and other memberships that the business deducts as marketing or another business expense (Costco, anyone?) but that you’d want to keep after you sold.
• Computers you’d have to buy new for personal use instead of picking up cheap after your business had fully depreciated their cost.
• Salaries for your kids, perhaps, that cover some of the expenses you’d have to pick up if they weren’t working for you.
• And, of course, all those medical expenses that you can’t deduct once you’re not a business owner.
• Oh, and that pesky capital gains tax that you need to set aside. And this could be a significant sum if your cost basis to start the business was minuscule. 

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.

A “good deal” can still be a bad deal for you.

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, 

• You’ll probably be left without enough capital to start another business.
• You’re not positioned for a comfortable retirement in your preferred lifestyle.
• You may even have to go back to work at someone else’s business. 

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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