Starting a Business? Consider When to Cash in Your Chips

Starting a Business? Consider When to Cash in Your Chips

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It may sound bizarre for entrepreneurs who are planning a new business to also think about selling your business. Entrepreneurs are filled with visions of growing the businesses, employing more and more people, branching out.

However a key part of business planning should be to record your objective in starting or buying the business.

This could be the need to be your own boss, wealth accumulation, social good, desire for power or others. Many entrepreneurs open or buy a business with the sole intent of improving its value so that it can be sold at a large profit.

Contrast this with others who build businesses in fields that interest them, and the business becomes the sole passion of the entrepreneur. If this business is sold the entrepreneur will have lost their primary interest in life. Restraint of trade is usually applicable to business sales, so the entrepreneur will not be able to start again in the same field.

Related: How You Can Build a Creative Business From Scratch

What happens after?

What happens after the sale? Will you retire, go into a different field, work for charity or mentor young entrepreneurs? Or will you become bored, restless and depressed, with nothing to fill your empty days?

 

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You will probably have been working intensely, travelling a lot, taking tough decisions, overcoming difficult problems and suddenly all that goes away. If you have nothing to replace that lifestyle you will need to adjust.

If the business is sold to a larger group, part of the sale price may be based on guarantees that the business will attain forecast profits.

There could be an employment contract for the entrepreneur to run the business as a division for a year or two. Be warned that it is unlikely that you will be given freedom to run the business unit as you choose to, and are used to.

Large businesses run on different rules, and these may even limit your ability to make the performance guarantees. Do not expect sympathy.

One entrepreneur in this situation described it as, “The prison sentence I need to serve before I can enjoy the money paid for my business, after the performance guarantee amounts have been deducted. Forget those, they can never be met.”

Other entrepreneurs have slotted happily into the larger organisation and carved out great new careers. Which will you be?

Succession

Many businesses are sold to family members or managers of the business. The plan is usually for the entrepreneur to stay involved to guide the new owners who will pay the purchase price out of future profits, providing retirement funding for the entrepreneur.

If this is your plan then take a dispassionate look at whether the family members or managers are really capable of running the business, and genuinely want to. Some family handovers have ended in failed businesses, poor retirees, bitterness and estrangement.

It is better to start succession planning earlier, with increasing responsibility and authority being delegated to the successors, who eagerly accept both the authority and the responsibility.They should develop their own financial plan to pay you out while retaining your mentorship.

Many entrepreneurs get to retirement age having assumed they have a successor only to find that they have none and must either continue to operate the business or sell it for the value of the assets. Nobody wants to see the destruction of something that has taken a lifetime to build.

Succession and business sale plans are best made rationally and early, with the interests of the business, its stakeholders and you the entrepreneur catered for.

But out-of-the-blue offers come to entrepreneurs all the time and fortunately they are good at making difficult decisions quickly. If you have thought about sale and succession in advance it will be easier not to get blinded by the big numbers on offer.

Related: How to Survive – and Grow – in Tough Times

Ed Hatton
Ed Hatton is the owner of The Marketing Director and has consulted to and mentored SMBs in strategy, marketing and sales for almost 20 years. He co-authored an entrepreneurship textbook and is passionate about helping entrepreneurs to succeed.