Selling your business is not only a difficult decision to make, but it can often be a costly one if not done correctly and objectively. And while the particular path you choose for your exit will inevitably vary, it is important to understand who will help you in that process, in what capacity, and what responsibilities you have as an owner. If you are thinking of selling your business or planning to sell in the future, here are the costs you should consider.
“If done right, you will only sell your practice once. You’ll never get good at it, and that isn’t a bad thing – just make sure you have assembled your ‘dream team’ to help guide you through the process.”
– David Grau Jr., President & CEO of SRG
Valuations are incredibly important to ensure you have a realistic idea of the value of your company. When selling your practice, the valuation should be used as a guide to set the initial price, and not the sole factor that influences the value you receive for your life’s work.
Valuations typically assume fair market value (FMV) – this means the value of the company, assuming an arms-length transaction between a willing seller and buyer, both having full information and neither being compelled to act. Rarely are transactions this sterile. Often, the parties know each other and may have synergies that could increase or decrease the value for a particular buyer.
Additionally, valuations rarely take into consideration the unique combination of deal terms (e.g., down payment, remaining balance, dispersion of funds, adjustments/clawbacks, timeframe, taxation, etc.) – which can greatly impact the total value received.
For example, a seller may receive a 4.3x multiple of revenue on their practice, but if they receive it on an earnout over a 10-year period, this is a far worse deal than a Seller who may receive a 2.5x multiple on their practice all in cash on the day of close. Knowing your value is important, but knowing your worth is crucial.
The cost of professional business valuations ranges in price from $800-$20,000 based on the type of firm you engage and the scope of work.
Finding and screening buyers, negotiating the deal, putting the contracts together, evaluating the tax strategies, and creating your post-sale transition plan should not be something you do alone. But, it is important to understand the options you have for external support with any/all of the post-valuation steps. Support to get the deal put together can take the form of:
Which deal support strategy is right for you? That depends on your priorities. For those seeking a quick, simple and easy sale of their business, working with a neutral non-advocate to help facilitate the deal between two peers is the preferred solution. For those seeking the perfect successor and/or the best price terms, you’ll need to retain someone to act as your advocate.
Using a team like Succession Resource Group as your advocate provides a significant advantage to a seller.[1] Often, retaining someone to represent you in the sale can be very expensive, worth it in many cases, but expensive. With SRG’s Seller Advocacy Program (SAP), there is no fee to the seller, as this is paid for by the buyer.
The following table provides a detailed comparison of your potential choices.
Seller Advocacy Program |
Turnkey Deal Support |
Self-Guided (DIY) |
|
| Type of Fee | % of Sales Price | Flat Fee | Hourly w/attorney + CPA |
| Amount | 6.00% | $8,000 - $20,000 | $10,000 - $50,000 |
| Who Pays | Buyer | Buyer & Seller (50/50) | Buyer & Seller |
| Support | Seller advocacy | Neutral (buyer/seller together) | Buyer & seller each have counsel |
| What is included? |
|
|
|
It is always recommended that you communicate with your attorney and CPA prior to selling or buying a business to ensure that all legal and tax issues are discussed and agreed upon. Using legal counsel and professionals who know and understand your situation – both personally and professionally is crucial. Attorneys and CPAs typically charge on hourly with rates ranging based on the size of the firm and geographical location. Finding counsel who is knowledgeable about your industry and business brokerage is an almost impossible task.
Common insurances for buying and selling a business include Prior Acts Coverage and life insurance on the buyer’s life if the deal is not paid for 100% at closing. These insurances are important to ensure you are protected pre- and post-sale. Occasionally, these insurance policies are also a condition of lenders. Generally, the Prior Acts Coverage is already included for those affiliated with a broker-dealer, but it is important to evaluate this prior to closing.
The IRS will always get their money! And, how you structure a deal from a tax standpoint will directly impact the amount of money you receive. SRG will provide you with detailed recommendations based on past deals like yours, which you can then discuss with your CPA.
All businesses tend to have long-term contracts, which can be hundreds of thousands of dollars. If done correctly, closing a transaction can be timed near the end of such commitments, or may be retained by a buyer. These costs may include lease costs, software, copy machines, and telephone providers.
Research is essential when preparing to sell your business. Understanding your options for sale, which professionals you want or need to assist you, and the costs associated with the sale will help you eliminate unexpected costs. Our experience working with thousands of advisors, RIAs, and insurance agents over the years has taught us that finding the right successor is the first priority for sellers, but ensuring you receive full value for your practice and proper counsel is a close second.
[1] Peak Business Valuation LLC, “Costs when Selling your Business”, May 26, 2020. Kelli Hutchins. https://peakbusinessvaluation.com/costs-when-selling-your-business/