When To Stop Clients From Selling Their Businesses
There are approximately 31 million American entrepreneurs, with more businesses being created each year. At any time, a number of these business owners will be considering a liquidity event.
Granted, there are many reasons a homeowner might consider a sale, including high multiples, retirement, no estate, cash needs, death, or divorce.
But aside from these good reasons to sell, entrepreneurs and their financial advisors should have a serious discussion about whether a sale makes “life sense”, recognizing that there are many times when sale of their business by a client is asking for unnecessary trouble.
Indeed, having advised many entrepreneurial clients for several decades, I have witnessed the challenges inherent in a liquidity event and found that sometimes the most valuable decision is not to sell.
Going through a transaction can often be tumultuous. It can be quite difficult to run your business effectively, while simultaneously focusing on all the elements of a sale. The pressure of juggling the two arrangements can break families, marriages and partnerships. It can also end up derailing a trade if a lack of attention to fundamentals affects the company’s valuation.
Wealth management firms and family offices can best serve their entrepreneur clients by carefully guiding them through a number of key considerations to determine if selling the business is truly the right choice for them.
Go beyond the numbers
In general, there are two litmus tests for determining whether a liquidity event makes the most sense. First, and perhaps most obviously, there are quantitative considerations: unless there is a catastrophic trigger – death, divorce, dissolution – sell if the math works.
The second is more complex: is the entrepreneur emotionally ready to drop the business?
In particular, will a liquidity event improve their quality of life and that of their loved ones? On the other hand, will such a transaction negatively affect their relationship with a spouse, children, family and friends? And are they prepared for the emergence of new complexities with multigenerational wealth planning.
Sometimes the proceeds of selling a business aren’t worth the unintended consequences of sudden wealth. While a profitable business gives the entrepreneur a sense of purpose and a reliable cash flow, severing that bond could create a feeling of unmooring that spills over into several other areas of their life.
For young business owners, the generation of significant cash can make it difficult to integrate new wealth into a meaningful, goal-oriented life. It might be tempting for them to try to solve problems with money and no longer learn to problem solve, adapt, or compromise.