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By Deven Desai

You may be thinking: Why should I sell my company when I have grown and built it from the ground up with years or decades of dedication and intense effort? The fact is that if money is the primary object and you have a business that is generating a lot of cash, you'd probably be better off not selling. That said, there are certainly situations and changes in life circumstances that present good reasons to sell your business. Here are a few of them:

  • Retirement — At a certain point in life, you may think about retirement and taking on a relaxing lifestyle. In order to retire comfortably, you might put your company up for sale to earn a large chunk of cash at once that you can use to relocate or fund other retirement activities like travel. In addition, the release of stress and responsibility from running a business would allow you to truly enjoy the rest of your life. Spending time with family and friends or pursuing passions can be even more rewarding than running a business.

  • New Opportunity — As the world is constantly changing and there are so many new problems arising, you may realize that you want to pursue a solution to a different issue. Instead of completely changing your current company, you may decide to sell your current business and start a new one from the ground up. Some entrepreneurs enjoy moving from business to business and the excitement of pursuing different ideas instead of sticking to one company. Building and selling business after business can be quite profitable as well.

  • De-risking — There are high risks that come with running a business because of the ever changing political, economic, and cultural climates. An economic crash or change in industry regulation could seriously impact a business and cause it to go bankrupt in the worst case scenario. Consequently, if you are averse to risk, you may decide to sell your business when it is strong and still growing to exit and earn a solid valuation. You can then invest your profits in mutual funds to further de-risk and watch your money grow over time without the relative uncertainty that comes with running a business.

  • Industry Strength — The industry your business operates in might be attracting a lot of M&A activity with high EBITDA multiples. For example, during the depths of the pandemic, healthcare software and telehealth M&A activity was quite strong because of the focus on more contactless options to receive healthcare. As a result, many businesses within the healthcare software industry had good exit opportunities because they could command high valuations based solely on industry strength. Being in an industry that is booming due to current events and changing cultural/societal trends can influence you to put your business up for sale and try to maximize their profits while the timing is right.

  • Burnout — Running a business can be an extremely draining process, both mentally and physically. You may decide to sell your businesses to relieve yourself of stress, anxiety, fear, and other negative emotions. Stepping outside of an operational role and enjoying the big payout from selling a business allows you to enjoy life and take some time before finding another endeavor to pursue.

For perspective, the below chart shows the reasons why owners of business worth $5 - $50 million have decided to sell. (The information is pre-pandemic).

Everett, Pepperdine University — 2020 Private Capital Markets Report, page 80

While there are many reasons to consider selling a business, you should also be mindful of selling a business too soon or for the wrong reasons. You should also not sell your business too soon to earn some money when you believe in the long term growth potential of your company; in an extreme example, Snapchat’s Evan Spiegel refused a $3 billion dollar from Facebook because he believed in his company, and this paid off when Snapchat later filed for an IPO. In addition, if you enjoy running your business and being your own boss, you should continue to run it.

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UPDATE 2 (January 12, 2021): With Democratic control of the Senate, the incoming Biden Administration will have an easier path to implementing its tax plan. The sense is that tax reforms — including an increase in capital gains tax for high income earners — stand a reasonable chance of being passed but a far lower chance of having an impact on taxes in 2021. More here, here, and here (with a paywall on the last link).

UPDATE (November 11, 2020): With the presidential election now behind us, focus shifts to control of the Senate. The outcome of the run-off elections in Georgia will determine whether the Biden administration will be able to enact its tax plan.

The political betting markets suggest that former vice president Biden will be elected in November. Though this is far from certain, it is useful to reflect on the implications of the tax policy changes of a potential Biden administration on the sale of a small business.

According to an overview of the proposed changes by the American Enterprise Institute, a Washington think tank, his plan would tax capital gains and dividends as ordinary income for taxpayers who report $1 million or more. This means that capital gains for high income earners will bump up to 39.6%, the highest tax bracket under the proposal. Currently, capital gains are taxed at up to 20%, so this increase would roughly double the current rate.

Whether these changes are enacted also depends on which party controls the Senate, which is currently up for grabs. Should the changes be adopted, they could be effective for the 2021 tax year.

So let's say you're selling your business for $10 million and are expecting $9 million at close with the remainder going into a seller note. Assuming $8 million in capital gains from the sale and no state capital gains tax, you'd take home $6.4 million under the current tax code and around $4.8 million under the proposed plan.

Worth thinking about if you are considering the sale of your business.

By Keshav Narendra-Babu

Working capital is the operational liquidity of a business or the capital need in order to run the business, usually defined as current assets minus current liabilities. It is essential to maintaining business operations.

Buyers of a business want to make sure that there is enough working capital left in the company in order for a smooth transition and efficient operations post-acquisition. In order to ensure this, buyers analyze the amount of working capital used in the company’s past months and calculate a working capital peg. A working capital peg is a specific target for the working capital needed in a company at the closing of an acquisition.

In order for a sale to be made, both buyers and sellers have to agree on a specific peg amount, and after the acquisition is confirmed, an outside assessor analyzes the

final balance sheets in order to determine the amount of working capital that was kept in the business. If the seller kept more working capital than the peg target, the excess amount is paid by the buyer to the seller. If the seller kept less working capital than the peg target, the deficit is paid by the seller to the buyer.

Negotaitions around working capital can present some of the most contentious parts of a business sale. Disputes often arises in the last few stages of an acquisition, when final terms are being negotiated. It’s important for business owners to understand the implications of working capital throughout their selling process in order to better position themselves

to receive a fair price for their companies.

Given the interests of all parties regarding working capital, it is important to strive for accuracy in calculating the working capital peg. There are several factors to consider, including the seasonality of a business, as the timing of an acquisition plays a significant role in working capital discussions. A seller should be looking over past balance sheets in order to compute average working capital and prepare early for working capital pegs that will be captured in the LOI. In this way, the seller is better positioned to preserve as much value as possible while also servicing the buyer’s needs and concerns in a fair manner.

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