Most business owners don’t even think about the exit-planning process until two specific life changes happen at the same time—they decide they don’t want to work anymore, and they realize they could achieve financial independence by selling their business and moving on.
It’s time for that to change. Because of how complicated selling a business can be, and how much money might be involved, it’s in your best interest to start thinking early about how you want to exit your business and how you maximize your financial benefits when doing so.
Whether you think you’ll want to transition away from work in a decade or just a few years from now, it’s smart to have a plan for your next steps. After all, you will leave your practice one day, no matter what. What happens during that process—and after— is up to you.
What to Ask Yourself Before Selling Your Business
No matter how far away your practice sale may be, there are three main questions you need to answer before moving on to the next phase of your life. Once you answer these questions, you can begin forming a plan that makes sense with your long-term goals and your finances.
1. Who will I sell my business to?
There are two main paths most people follow when they decide to sell their practice. It’s fairly common to sell a business to an insider, like a family member or a key employee. However, you might also find an outside third party through marketing or word of mouth.
Selling to an insider
A sale to an insider could mean selling your business to a family member, a co-owner, or a key employee. This option may ultimately mean you get the change to remain active in the business and on favorable terms with the new owner until the transition is fully complete and you have all your cash in hand.
On the flipside, you’ll probably find that selling to someone you know means more risk, including financial risk. If the new owner can’t meet obligations and it’s someone you know, you could wind up stuck with a bad business deal for years to come.
While a certain amount of risk may be normal, the best way to minimize problems with selling to an insider is to begin transitioning the practice early, well in advance of the actual transfer date. This gives you more time to plan a methodical transfer of care and finances, and reduces your risks. Starting early also gives you time to work out a backup plan if the sale goes awry for any reason.
Selling to a third party
In instances where you don’t have an employee or family member who’s willing to take over your business, you can start exploring other options like selling to a third party individual or company. You may even find strategic buyers like private equity groups or large, regional multi-location therapy groups that are interested in the sale. In some cases, another clinician in a related field who wants to expand her core services and branch out as a multidisciplinary provider could be interested. For example, it’s not uncommon for a physical therapy practice to buy a speech-language pathology practice so they can offer multiple services in-house.
Any time a third party is involved, a seller has the best chance to receive the maximum price for their practice. Meanwhile, this is also the best way to receive the highest percentage of cash at closing.
Of course, there are also drawbacks involved in selling your business to someone you don’t know, including the risk that the new owners may have a totally different vision for the company than you do. In my experience, many practice owners cite this as an essential reason in choosing who they sell their practice to. When a sale is made to a third party, a different corporate culture often needs to be integrated into the practice, and roles and working relationships can and often do change.
2. When do I want to exit?
Like any other goal, planning ahead is the key to success. After all, you may not sell your business overnight, but you should also be prepared to move quickly if you find the right buyer. Personally, I’ve seen practices transfer between buyer and seller in as little as six months—but I’ve also seen final sales that have taken up to 12 years to complete.
While there are advantages and disadvantages to selling your business quickly or taking your time, you still need to have an idea of when you want to leave, even if it’s just a range of time.
You should also ask yourself the following questions:
- When do I want to retire?
- Do I want to take a sabbatical and return to the business at a later date?
- Do I plan to start another business?
Only you can decide when you want to exit your business, or when you want to begin the process of looking for a buyer. However, you should start thinking about it early so you aren’t stuck working longer than you really want to.
3. How much do I really need to sell my business for?
You want to make sure you’re selling your business for as much money as you can. Obviously, not doing so would mean leaving money on the table, which means less money to spend once you no longer have the financial responsibilities of a business owner.
Not only that, but it’s possible your business is your retirement. In fact, according to a CNBC poll, 78% of small business owners say the proceeds from the sale of their business will fund 60% to 100% of their retirement income.
Unfortunately, 98% of business owners do not have an accurate valuation of what their business is worth. That disconnect makes it nearly impossible to create a viable retirement strategy. After all, you can’t plan for the future if you don’t know what your future looks like.
This is one area where you may want to work with a professional to get an accurate number. The valuation of your business is too important to use general rules of thumb or non-industry comps. There are methodologies to give you estimates of value and valuations specific to owning a private practice. With a fair estimate of value, you’ll know exactly what your business may be worth, and you can use that figure as a guideline for negotiations.
Don’t Exit Your Business the Wrong Way
After speaking at a conference three years ago, a practice owner shared her story with me. Her spouse earned a promotion and the family was relocating across the country, so she referred her entire client base out to other practitioners without receiving a dime. While it’s incredibly noble that this client transitioned her caseload, she would probably be devastated to know I later valued her practice at $650,000.
I share this story because it shows the real-life consequences of not having an exit strategy in place, and because it shows what can happen when people have no idea their business is something others would pay for.
Do your research and start planning early, and no matter what, make sure you have all the information you need to make an informed decision. Whether your business is worth $65,000 or $6,500,000, the price of not having a plan is far too high. You’ve worked your whole career to build your business, and you should give the same care and attention to selling as you did to growing it.
This material is intended for general public use and is for educational purposes only. By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity. Please contact a financial professional for guidance and information that is specific to your individual situation. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Craig Goldslager is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 2 South Biscayne Boulevard, Suite 1740 Miami, FL 33131, (305) 371-6333. Securities products and services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. CA Insurance License # 0K78754 2021-119782 Exp 04/23.