When someone starts a company, they have a personal desire which closely aligns with the business goals. But it can so happen that perhaps the alignment isn’t so strong anymore, and one can seriously consider selling the business off. There can be many reasons that can lead to such a decision.
Perhaps you’ve envisioned turning the business over to your children, but they’re not interested. Or maybe it’s time to retire and enjoy the assets that have been accumulated over the years through sheer hard work.
Selling the business comes with many benefits, of course, but there are some pitfalls to consider. Let’s have a look!
BENEFITS AND DRAWBACKS OF SELLING A STARTUP
|Fix your own selling price||Buyer qualifications|
|Diversify personal finances||Increased risk|
|Potential Tax advantages||Unfavourable terms with other lenders|
|Wider pool of buyers||Tedious process|
ADVANTAGES OF SELLING A STARTUP
It is true that no one knows your business like you do. It also put the seller in a unique position of knowing everything there is to know about it. Since you already have an existing relationship with all the departments be it, suppliers, key employees or even customers, such an arrangement can actually increase the value of the business.
It is a brilliant option to consider is to sell your business but remain as a senior leader, advisor, or consultant. It can be either on a full-time or part-time basis, depending on your availability and commitment. No one knows better when you’re ready to pass the torch.
• Fix your own selling price
It can be ambitious where one has that itch to move from running a mature business to creating a brand new start-up. Involving outside parties costs money. Bringing in mergers and acquisitions professional will also require a percentage of the sale price to be forsaken. This fee is usually 2% to 10%, depending on the sale price and can be saved by doing all this work by yourself.
- Diversify personal finances
This is one of the biggest advantages of selling your startup. If your most valuable asset represents your equity in the business, selling it can benefit you largely. It actually allows the seller of the startup to turn all or most of those assets into more liquid and more diversified investments.
- Potential tax advantages
When a seller receives the entire purchase amount upfront, it can throw them into a much higher tax bracket, forcing them to forfeit more of their hard-earned dollars to Uncle Sam. Financing over a period of years can keep your tax burden lower. The sale of the startup represents a significant one-time event, which allows no do-overs and needs to be thoroughly checked.
- Wider pool of buyers:
Without seller financing, many prospective buyers might lack the financial wherewithal to purchase the business. Potential buyers could pay more for your business if you agree to stay on because it reduces their risk and lessens disruption. By limiting the number of buyers, it may take longer to sell the business. On the other hand, you have a better chance to sell quickly and receive a higher price, by offering to finance part of the sale.
DISADVANTAGES OF SELLING A STARTUP
We put this at the top of the list for a reason. It’s imperative that your plans to sell stay confidential, both internally and externally. Whatever the reasons are for selling your startup, it is extremely essential to think of the process thoroughly. If word gets out, you may lose key employees, intellectual property, and clients. Publically, you want your plans to remain confidential for as long as possible. Leaks can impact buyer response and offerings and put you in a less-than-ideal negotiating position.
- Buyer qualifications
Even if you’re qualified to sell your business, a buyer might not be qualified to purchase it. Buyers should be evaluated and many pre-qualified before you share any information with them. There’s a lot at stake, so take the time for due diligence. An M&A professional will screen buyers so you don’t waste your time.
- Increased Risk
There is a chance that the buyer may not know as much about the business or the industry and can mismanage the operation and default on the loan. If the loan is financed by the bank, that is not the seller’s problem. However, the seller will be on the hook if the business fails. One way to alleviate this risk is to request a higher down payment and require the business assets as collateral.
- Unfavourable terms with other lenders
Consider that a seller finances part of the purchase while the rest is done from by the bank. In such case, the bank may ask for certain terms on the loan in the event of a default, and requiring the seller to wait a certain period of time (usually up to two years) before the buyer starts making payments on the seller-financed portion. These issues are extremely crucial and must be taken into consideration before deciding if one wants this type of arrangement.
- Tedious Process
There’s no specific procedure for selling a business but there are many little nuances that can be impactful. With legal, financial, and tax issues at stake, getting it wrong could influence your cash proceeds. You must know what you’re supposed to do and when. Take the time to conduct the sale of your business as carefully and thoroughly as you now run it.
Selling a startup can be a huge step. The sellers may be slightly biased before selling but the pros and cons don’t lie and can actually help one in making a well-informed decision. It’s advisable to consult an expert since the money you spent on them will not only return but will also provide valuable guidance in every step of the way. You’ll only get to sell this business once so be sure to do it right.
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