Get a FREE copy of Jim’s newest resource, “87 Things an Owner Needs to Know About Selling Their Business”: DOWNLOAD

Ask the Right Question First

“I am making great money, and I love what I’m doing. But with this economy, lord knows where it’s going after the election. Maybe I should just sell now.”

Randy (not his real name) called me on the advice of his Raymond James wealth advisor. Randy is getting weekly calls and emails from private equity buyers asking about his interest in selling. “I really hadn’t planned to sell until my youngest son finishes college in six years. How do I know it’s time to sell?

Randy could sell his business now and never have to work again. That’s a good place to be at age 52. But does that mean he should sell now? Not necessarily.

Knowing when to sell your business, when you don’t have to sell, is a tricky decision, especially when the business is growing. My general advice is to sell before you have to, but that doesn’t answer the question, “when is the right time to sell?”

When faced with a decision to sell, the business owner needs to consider what the probable take-home proceeds will be after paying off debt, closing costs and taxes. Then with the help of a wealth advisor, the owner needs to decide if the investable return on those take-home proceeds will support his/her lifestyle or next career move.

But here’s something I’ve observed working over 25 years with hundreds of business deals. If the business owner is spending more than 60% of their business’ annual EBITDA, unless the owner is retirement age, it will never make sense to sell. In fact, that owner literally can’t afford to sell!

Take the case of Randy (remember, not his real name so I’m not giving away any confidential information). His business generates annual EBITDA around $1.1 million, and he pays himself almost all of that every year. He has, shall we say, a nice lifestyle. The market value of his business is about $7 million. He doesn’t have debt, so after all expenses/taxes are paid, he would have about $4.75 million of investable proceeds. His wealth advisor told him he could invest those proceeds and return about $180,000 per year after taxes. But how does a guy who’s used to taking home after taxes around $750,000 per year suddenly start living on $180,000 per year?

Now, if Randy was at retirement age and ready to slow down and change his lifestyle, putting $4.75 million in the bank and living off $180,000 might make sense. But a 52-year old business owner might not be able to do that.

Randy realized that, while he has a great business that has given him and his family a very nice lifestyle, he cannot afford to sell it yet. He is as captive to his business today as he was the first few years when he hadn’t yet hit breakeven. Isn’t that a weird place to be for a guy who owns a business worth $7.5 million?

So the question, “when is the right time to sell?” might be the second question to ask, after you’ve answered the most-important question: “can I afford to sell?”

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

The following two tabs change content below.

Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

Latest posts by Tennessee Valley Group (see all)