Occasionally we discuss exit strategies here in the Seller Community, and it’s certainly an important step in the business owner journey. Admittedly, it can be hard to grapple with — you pour all your energy, money, and time into building and nurturing a business, so how could you even contemplate handing the reins over to someone else? Regardless of how ‘icky’ it feels, it’s important because the process of extracting yourself from a business — or selling it — can take a considerable amount of time and have legal and tax implications for everyone involved.
An exit strategy is a business owner's strategic plan to sell ownership in a company to investors or another company. It outlines a process to reduce or liquidate ownership in a business and, if the business is successful, make a substantial profit.
Today, Square Small Business Evangelist Aylon Pesso and I are back with another set of questions, this time on the topic of closing a family business. We pose some thoughts about exit planning, and Pesso shares his experience of selling his family-run ice cream store.
Can you transfer your business to your family?
Have you discussed the legacy of your business with your family? Do they actually want to continue to manage it without you? Do they have a plan for the business? You might be surprised to learn that your family is not on the same page as you. They might have a vision for the future of the business, or they might not have considered that at all. A family member will also need to establish their own relationship with lenders, suppliers, vendors, staff, and customers if they haven't already.
Almost inevitably there will likely be some tax implications for your child or children or family member(s) who are inheriting the business. This looks very different in each state, and is different again across the world, so getting local-specific professional advice is critical. Consulting with a tax professional is strongly advised.
Aylon Pesso is the first Square Small Business Evangelist. Before joining Square he ran an ice cream store with his father in Queens, New York. Aylon Pesso has direct experience selling a family business, and shares how he and his father made a plan together:
My dad and I started up our family ice cream business in 2004 when I was 14 years old, so we didn’t really get to have the big conversations of legacy and future at the beginning. But as time went on, I was always thinking about whether or not it was something I wanted for the rest of my life.
As I got older and the business got busier, we started to think and talk about what to do when my dad was ready to retire. He offered me the option to buy it from him, but never insisted on it. But I realized that running the business wasn’t what I wanted to do for the rest of my life. The main reason I worked there and ran it was because of circumstance, and that I really enjoyed working with him. Ice cream wasn’t my passion, and after so many years, I was ready for a new challenge. So in 2016 we set the goal of getting out and hopefully trying to sell it within the next 10 years.
Can you sell your business?
Have you considered selling your business? How do you make the decision to sell? Where do you even start? Aylon Pesso and his father were able to sell their ice cream store to a customer. Aylon explains,
We knew we wanted to get out of the business, so the next question was how to do it. The worst case scenario was just walking away, closing up shop, and trying to sell off equipment piece by piece. We knew there was a lot of value in the business since it was a profitable and smooth-running operation with a solid customer base and reputation, along with the value of the recipes and manufacturing since we made all of the ice cream ourselves. Selling the full business as-is was our goal. We didn’t know if we were going to be able to sell, but we started planning for it.
Calculating your Worth
The big mission was to figure out an asking price, and we knew that we had to first try to calculate our worth, so we created a spreadsheet to start to put down all of the relevant numbers and information. We started with the tangibles, figuring out how much the equipment would cost for someone to buy used. Then we calculated our annual income and expenses and profit for each of the last five years. I did some quick Googling to get a general idea of how much to charge for a business, and I often saw somewhere around two to five years of profit, so we based our number around that.
Finding a Buyer
We wanted to avoid just listing the business on open postings since, in our experience, whenever we saw a business post a For Sale sign, customers assumed the business was closed and would stop coming. We wanted to announce that it was sold and will continue, rather than it was for sale.
We got really lucky with finding a buyer. A long-time customer just happened to approach us, asking if we would be interested in selling. He runs a couple of restaurants, loved our community feel, and wanted to try something new. It took about a year from the initial conversation until we sat down to work out the details, and we were lucky to make it happen pretty quickly after that.
Sale Process
We hired a really good lawyer and accountant to make sure we did everything by the book and were protected.
Part of the sale agreement was that we would stay on for a month in order to teach the new owners everything about running the business. We also had to put together an entire written instructional guide for everything. Luckily we had most of it already written down as part of our employee training guide, but some things weren’t documented since we did them ourselves.
Emotional Impact
Making the decision to leave a business is not easy. It was part of our lives for 18 years and we poured so much of ourselves into it. We often went back and forth and thought about continuing it, even after we made the decision. But we realized it was the right move for all of us and for the business. It’s been a year since we sold it, and we’re really happy with the way it all worked out.
If you have a business partner, your agreement might give them the option to buy you out of the business. If you don’t have an agreement yet, you might consider making a formal document that stipulates what happens when one person wants to move away from the business or what the plan is to sell the business if that’s your ultimate goal.
Steps to Help you Plan Ahead
It's incredibly important to have these conversations and think these things through BEFORE they happen — especially if you have a business partner.”— @DinaLRosenberg, In the News
✔️ Make a decision about passing your business to family, selling to a business partner or someone else, or closing your business.
✔️ Do you plan to retire? When? What does retirement look like for you?
✔️ Set a timeline for yourself.
✔️ Communicate your decision with your family, business partner, or staff.
✔️ Get advice: A lawyer/solicitor, a tax professional, or an accountant should be able to provide impartial advice, help you see the best way to proceed, and help you prepare the right documents.
✔️ Be patient.
Resources
There is a wealth of information available online, but getting advice from a tax professional, accountant, or business consultant is advised.
- U.S. Close or sell your business | U.S. Small Business Administration
- Canada Change of owners, partners or directors – Canada.ca
- Australia Closing your business; Sell your business.
- Ireland Closing a business; The five simple tips on how to sell your business | Independent.ie
- UK How to close a business | FSB, The Federation of Small Businesses; How to sell your business | FSB, The Federation of Small Businesses
Helen is a Seller Community Manager at Square and is the editor of the Seller Community Blog. She writes about small businesses and the owners and entrepreneurs that are a part of the Seller Community.
Aylon Pesso is the Square Small Business Evangelist, helping sellers run their businesses better. Based in the U.S., he is a former small-business owner, consultant, and Square Seller.
Cover photo by John Schnobrich on Unsplash.
This article is only for advisory purposes. The information provided solely reflects the authors’ views and is not endorsed by Square. This article is limited in scope and is only intended as a high-level overview of the topics mentioned. Nothing in this article is or should be used as tax or legal advice. For guidance or advice specific to your business, you should consult with a qualified professional.
