Focus On Net Proceeds And Not Just Sale Price When Selling Your Business
John was excited, “today is the day!” Twenty-five years ago this month, he had started his home remodeling business with a truck and a tool belt, and today, at 3 pm, he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family, and hobbies and other interests they both enjoyed.
The amount received exceeded John’s “number”; hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. Through the years, John built a “sellable business,” focusing on a strong management team, strong financial performance, a growth plan, up-to-date systems and processes, and other value drivers. Now, he was reaping the rewards. There was indeed much to celebrate!
Fast forward six months later, John realized that his number needed to be much larger than he had initially calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following vital factors in the equation:
Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:
Transaction and professional fees.
An asset sale was negotiated, and there was income tax on some asset depreciation recapture.
$1 million in business debt needed to be repaid.
Capital gains and Affordable Care Act taxes.
Miscellaneous expenses, including “stay bonuses” for two key employees.
John was among the small percentage of small business owners who built sellable businesses and sold them for their “number.” For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned. What could John have done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well before the sale in calculating the actual number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.
