Three Ways to Answer the Question: "When Should I Sell My Business?"
When is the right time to sell your business?
Timing the sale of your business based on how the stock market is doing doesn’t make a lot of sense. So how should you look at when to sell your business?
There are many ways to look at answering this question. This one way here relates to your own personal timeline:
"How old do you want to be when you are fully out of your business?"
Timeline to Sell Your Business
Say you are 51 years old and you want to be completely out and on the beach by the time you are 58. Well, know that you are going to need about a 3-year window during which you work as an employee of the company that buys your business in what is called an "earn-out." An earn-out is when you actually work as an employee and you have a set of goals and objectives. The buyer then holds back some portion of the proceeds from the sale that are contingent on you hitting a certain set of goals as an employee of their company. The average earn-out in America is 3 years. It may be shorter if you’re in such a business, like manufacturing that doesn’t require a lot of people. Another way to shorten the earn-out is to really make sure your business is primed for you to not be involved in its success.
It could also be a longer earn-out such as in a professional service business like a dental practice or an advertising agency - it could be as long as 5 years. So it is safe to budget a 3-year earn-out window.
So if you are 51, wanting to be on the beach by 58, and you know you’ve got a 3-year earn-out, which means you have got to accept and sign a purchase agreement by the time you are 55.
Keep in mind it is going to take about six months to a year to actually negotiate and execute the sale of your business. Again, could be shorter, could be longer, but a safe budget is about 6-12 months to complete the sale. So now you have to back-time another year to factor in the time it takes to negotiate. Now you are 54 by the time you need to make the decision to go ahead and sell your business.
So again, if you are 51 today, you now know that you have got 3 years to get the business perfectly situated to go to market before you hit the age you need to start the selling process - you’ve got a 3-year window to work with if you know you want to be on the beach by 58.
Retire On The Sale Of Your Business
Another way here to think about the question “when to sell your business” is when your business is worth enough so that you can sell it to live the rest of your life comfortably without having to work.
Most financial advisors will tell you that you can withdraw about 3% - 4% of your portfolio of cash or stock market investments each year. So if you figure you’ve got $1,000,000 in the bank and you’re withdrawing about 4% that equates to $40,000 per year in income. And then you can back that into what you think you need in retirement income for what you need to make on the sale of your business.
Another way to do the same equation is to simply take your annual requirements for income and just multiply it by 25. That will allow you to get the number that you need in terms of after-tax proceeds from the sale of your business. Meaning that you actually get to invest in whatever asset pools you have when you actually exit your business. Keep in mind there are frictional costs associated with selling your business, like taxes, that you will want to get a tax opinion on to ensure that you maximize the after-tax take from the sale of your business. So be sure you are thinking about after-tax dollars when you are thinking about how much you need your business to be worth.
Your Walkaway Number
A third way here to think about it is what is your walkaway number? So how you should think about this is imagine someone walks through your door and they’ve got a blank check in their hand. They say “what do I have to write on this blank check in order for you to hand me the keys right now.” That is your walkaway number.