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selling your business MMR

By: Patrick B. Mathis

Before initiating the sale of your business there are many preliminary considerations.

From a non-financial standpoint, are you ready to step out of the owner’s role? Are you prepared for retirement? Is your spouse prepared for your retirement? If transitioning to a child, is he or she ready to run the business? If several children are involved in the business, will they smoothly transition into new roles upon your departure?

While the financial aspects of a sale or retirement often become the primary focus of preliminary analysis, sale or transition discussions, and the ultimate sale or retirement decision, these non-financial considerations are often overlooked, or given limited thought. On the contrary, they should often be the critical first step in deciding to sell or transition out of a business.

Frank discussions between owners and family members are frequently critical conversations. Assumptions as to the goals of other owners or family members often lead to decisions which ultimately frustrate the interests and objectives of many parties. A child who has spent 20 years in the family business may feel that he or she is entitled to step into management and continue running the business. On the other hand, the parents may question the child’s management skills, prefer to “cash out” and convert the business to cash, or feel that the company should be sold now to plan for all of their children and avoid future potential disputes.

Personal financial and lifestyle considerations should also be taken into account in considering a sale of the business. A business owner who takes home annual compensation of $200,000 per year as well as having the benefits of health insurance, club dues, automobile expenses, meals and other items paid for by the business may receive total compensation and benefits of $300,000 per year. While she may sell her business for $1,500,000 after taxes, this may net $1,200,000 to her. Assuming these funds are invested at a five percent rate of return, this would generate $60,000 per year. Will this reduced cash flow, perhaps coupled with income from the owner’s other assets and some spend down of principal, be sufficient to allow the owner to live a lifestyle which she desires? In many cases, this is a critical initial analysis. After this exercise, some owners may elect not to sell or to retain their business for several years after their initial consideration of a sale in order to build up investments outside of the business providing for post-sale income before moving forward with an actual sale.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.