Sell a Business Over Time

If you would like to retire in two to five years, you should start working on a multi-year exit plan now.  

Should I sell my business over time?

Selling a business is rarely like selling a house. When you sell a house, you close, they get the keys, and you can go on your own way. When selling a business, in order for the buyer to be successful, they often need you to transition many aspects of the business to them over time. These aspects include customer relationships, referral relationships, and sales and operations capabilities.

If a buyer feels comfortable that the transition of the business to their ownership will go well, then they will significantly increase their valuation for your business. To give a buyer that comfort, two things are necessary:

  • First, you have to work in the business, possibly on a part-time basis, for some time after you sell it. The amount of time necessary depends on the type of business. The more critical you are to the business, the more time will be necessary.
  • Second, the buyer has to believe that you have an economic incentive to make them successful. In businesses where the owner is critical to its success, that usually requires that the seller receive a share of the profits of the business after they sell it. That can happen either by the seller receiving an earn-out, which is a share of future revenues or profits, or the seller retaining an ownership interest in the business for at least a couple of years.

If you have ever watched it really race, you know that it’s important to have a period of time when both the person handing off the baton and the person receiving the baton are responsible for its not falling to the ground. Think of selling a business that way. Handing off the baton takes time.

How do I protect myself if I sell my company over time?

As you might imagine, if you sell a business but continue to share its profits or revenue with the buyer, then you need to ensure you are protected. For example: 

  • You need to ensure that you receive the amount of money you are owed. 
  • You need to retain control over the business during the transition.
  • You need to have the right to unwind the deal if certain requirements are not met.

If your purchase agreement does not specify its dispute resolution mechanism, then you could end up in court for a long and expensive legal battle. Even if your agreement specifies arbitration as its dispute resolution mechanism, that process could end up being quite expensive because arbitrators are highly paid attorneys and you will need to hire an attorney to represent you in an arbitration proceeding.

When we advise a seller, we devote a significant amount of energy to 

  • negotiating terms for our clients that protect them in every conceivable eventuality and 
  • ensuring that any dispute is resolved justly, quickly, and at minimal possible cost.

We implement a proprietary expert determination agreement into our clients’ purchase agreements. The expert determination agreement specifies a well-defined procedure whereby an expert follows a clear set of instructions to resolve disputes over specific factual questions in the purchase agreement. For example, if there is a dispute on how profit must be shared between a business buyer and seller, that dispute can be resolved quickly and fairly by an accountant following our expert determination agreement.

As you might imagine, if you sell a business but continue to share its profits or revenue with the buyer, then you need to ensure you are protected. For example: 

  • You need to ensure that you receive the amount of money you are owed. 
  • You need to retain control over the business during the transition.
  • You need to have the right to unwind the deal if certain requirements are not met.

If your purchase agreement does not specify its dispute resolution mechanism, then you could end up in court for a long and expensive legal battle. Even if your agreement specifies arbitration as its dispute resolution mechanism, that process could end up being quite expensive because arbitrators are highly paid attorneys and you will need to hire an attorney to represent you in an arbitration proceeding.

When we advise a seller, we devote a significant amount of energy to 

  • negotiating terms for our clients that protect them in every conceivable eventuality and 
  • ensuring that any dispute is resolved justly, quickly, and at minimal possible cost.

We implement a proprietary expert determination agreement into our clients’ purchase agreements. The expert determination agreement specifies a well-defined procedure whereby an expert follows a clear set of instructions to resolve disputes over specific factual questions in the purchase agreement. For example, if there is a dispute on how profit must be shared between a business buyer and seller, that dispute can be resolved quickly and fairly by an accountant following our expert determination agreement.

Valuation sufficiency

Another reason to begin thinking about selling your business several years in advance of when you will sell it is to ensure that you can sell the business at a valuation that meets your long-term financial goals. Many successful business owners speak with their financial advisors to learn the price at which they can afford to sell their business. Then, they speak with a valuation professional to see how far off they are from that price.  Increasing valuation to a goal level can require several years.

Sell a practice over time

Professional services practices are suited to being sold over multiple years because much of the value of the practice is tied to the owner themselves.  That value is in relationships with customers, referrers of business, and specialized expertise.  It can take multiple years to transfer that value to the buyer.  During that transfer process, the buyer will want the seller to continue to own a part of the business because that will incentivize the seller to transfer the business’s value to the buyer effectively.

You might wonder, “Do I need to sell my practice over time?”  Maybe the specialized expertise that makes your practice valuable is dispersed among several employees, or your firm’s relationships are tied to your company’s brand rather than to you personally.  To the extent those are true, you will have buyers interested in purchasing 100% of your business at closing.

We make transitioning out of your business easy, low-risk, and lucrative

No one comes to Next Bridge Advisors asking, “Can you help sell my firm over time?”  But they should.

Having been established for 13 years, we have built a network of 28,000 buyers and a unique combination of expertise in the finance, marketing, structuring, and dispute prevention aspects of business sales.  We sell businesses anywhere in the US and internationally. Email us at sell@nextbridgeadvisors.com or call (646) 504-4266 to learn how to maximize your earnings from selling your business.

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