Keep Your Eyes Open When Selling Your Business

by Jan 10, 2023Decision Making, Entrepreneur, Strategy

Sometimes selling your business makes sense.  This is one of the most common conversations I have with my fellow CEOs.  They want to discuss the timing and risks of selling their companies. A company sale is a life-changing event for most, especially since 90% to 95% of their wealth is typically tied up in the value of their business. The catch, of course, is that wealth is illiquid until you decide to sell that asset.

But there’s something important that many of these CEOs miss when selling their business. It’s not an endpoint. It’s a transfer. They’re just trading one set of assets for another. It possibly may not be the best way to manage your wealth. It could be a bad deal.

Why Selling Comes with Income Risk

When I ask business owners what they’ll do with the money they’ll earn when they sell their business, I always get some variation of the same answer: “I’ll deposit it in a bank and work with a wealth manager to invest it.”

In other words, you’re trading an asset (your company) for shares in companies you have no control over. And you will have paid capital gains taxes on the sale amount. You will also pay a transaction fee like legal bills and an investment banker for the privilege of making the deal.

Now, this could still make sense for you, especially if you had lost the passion and energy to run your business or your business was headed for some tough times. Selling at the top, if you can call it, is a good move.

But you also need to understand what you’re giving up by doing such a deal. In particular, I’ve found that many CEOs tend to overlook or undervalue the loss of income from selling the business will impact their lifestyles. Without the income from their business, they might need to spend their wealth on living expenses.

Let’s consider an example. Let’s say you own a business with $5 million in revenue that generates profits or income for you of $1 million a year. Now, let’s say you can sell that business for $10 million. After capital gains taxes, let’s say you net $8 million. We will ignore legal and banker fees that could add up to $500,000.

Once you invest that money, assuming a 4% to 5% annual return, your income will be $400,000. Plus, you’re no longer growing your assets at the same rate when you were developing your business, as private companies tend to grow faster than the market on average.

The net impact of the transaction was trading an asset worth $10 million and a $1 million income for assets worth $8 million and a $400,000 income. That makes you wonder why anyone would ever sell.

I’ve walked some CEOs through this scenario, and once their eyes opened, they thought completely differently about selling their company. One CEO even told me: “I can’t sell my business for enough to replace my income.”

And that is precisely the problem.

Rethinking The Value Of Your Biggest Asset

The good news is that there’s an alternative you can consider. You can convert your business into an asset. And you can do that by hiring a CEO to replace you in running the business. As you elevate your engagement with the business, this is the ultimate step, moving from operator to owner.

If we take our example a step further, let’s say you hire a top-notch CEO with a salary of $500,000. Your income is now $500,000, which is greater than you could earn from the market, you paid no taxes, and you still have control over your asset: your business. And you don’t need a brokerage statement to keep track of it. Hopefully, the CEO will continue growing the company and its value over time.

So, in short, you’re making more money than you would, and you’re still growing the value of your asset faster than if you sold the company and invested the proceeds in the market.

Open Your Eyes

Sometimes it makes sense to sell your business, like when you are ready to move on or have poor health. But when that time comes, make sure you’re doing it with your eyes open and that you’re getting what you need out of the deal–especially when it comes to replacing the income from the business.