As baby boomers enter retirement age and begin focusing on securing their nest eggs, a large number of privately owned businesses are expected to be sold and transitioned to new owners, many of whom will require some form of financing. The Wall Street Journal has predicted a $10 trillion wealth transfer by 2020 through the sale of small businesses alone. Uncertainty about the treatment of capital gains is also likely to spur sales of businesses, as owners seek to avoid potentially negative tax implications in the future.
This prediction is consistent with what we’ve seen from customers and in the market in general -- many small business owners are beginning to explore the idea of selling their business. At Union Bank, our business bankers help entrepreneurs seeking changes in ownership structure to develop creative strategies to accomplish their specific goals through our Small Business Administration (SBA) business acquisition program.
Selling a business opens up exciting new choices and possibilities. If you’re thinking of selling, it’s never too soon to start planning your exit and succession strategy. The more prepared you are, the more positive a role you can play in maximizing the proceeds from the sale and ensuring a smooth transaction. To begin this process, identify an exit strategy team consisting of legal, tax and accounting, banking and SBA loan specialists, and then follow these steps to help ensure a smooth transition:Learn what your business is worth
Receiving a preliminary valuation will help you understand what your business might be worth in today’s market. An early valuation and consultation with your accounting, banking and legal advisers may help you identify opportunities to maximize the value of your business before the sale. Having a strong exit strategy team is also prudent. Different industries use different valuation methods – some industries base valuations on assets, while others look primarily to income – so, for an accurate assessment of value, ask your business banker to recommend a business appraiser with expertise in your industry.Understand your tax consequences
The tax implications of selling a business can be complex. The tax liability will depend on the type of business entity you have as well as the type of assets being sold, such as equipment, inventory or goodwill. Speaking with a tax adviser early in the process can help you understand these intricacies so you can plan to structure the sale appropriately.Research prospective buyers
Be sure potential buyers have the financial means to complete the transaction. Information to request includes previous employment and business ownership experience, funds available for down payment and sources of financing, and the intended time frame for completing the transaction.
It’s common for sellers to finance at least part of the transaction. If you expect to do this, the research you have conducted will give you peace of mind by confirming that prospects have the experience, skills and dedication to manage the business successfully for the long term.
The most accessible capital for many buyers will be the SBA 7(a) loan program. It requires less of a cash down payment and less collateral than other forms of financing. It also provides for a lower monthly payment because it allows up to a 10-year amortization. These favorable terms may increase the universe of qualified potential buyers and make it easier for you to sell your business. It is very important to work with an SBA lender with specific experience in business sale financing because this process is generally more complex than standard SBA loans.Gather key records and documents