When private practitioners and solo entrepreneurs begin building their venture, the exit plan from the business is often furthest from their mind. But, as time goes on, this mindset can leave a significant hole in their financial picture, especially if they believe the business cannot function without them. In such cases, it values the most important asset of their professional career – their business – at zero.
Instead, developing a succession plan for the end of the business can help shape the company you want to run today and where you will take it later in life. Plus, it can provide a valuable resource to your long-term financial independence or retirement plan.
Small businesses and private practices have a unique relationship with the overall economy. And right now, by-and-large, small businesses are performing far better than their larger counterparts. In 2022, for instance, while the S&P 500 market index fell nearly 20%, male small and medium sized business owners saw revenues increase 22% while female owned businesses increased 27%, according to Biz2Credit. (Male-owned businesses had average revenues more than twice the rate of women-owned businesses.)
The same trend holds steady upon selling the business. While merger and acquisition activity has essentially disappeared since interest rates began to rise, small business activity has bounced back. According to BizBuySell, small business acquisitions increased by 4.8% during the first quarter of 2023 when compared to the quarter prior. That’s down 10% for the year, when activity began to decline, but overall sales prices have increased by 1.4% compared to the same time in 2022.
Understanding how to position your one-person business for an eventual sale, can increase the value of your company while adding protection for you and your family once you step away.
Build a Brand
One of the issues that the self-employed and solo practitioners face when selling their business is that they believe they’re the company and the company is them. Without them present, there’s nothing to sell.
This makes selling the business impossible, since you cannot pass on yourself.
But by building a brand, even in a solo practice or business, you can grow something that has value beyond yourself. This removes you from the front-facing aspects of marketing, except as a representative of the brand.
Yes, your current customers may come to you because of you. But future customers do not. Showing the value of the brand when you’re ready to sell will encourage a higher price.
Taking steps now to remove yourself from the front-facing aspects of the business marketing, can allow for time to show the value of the brand long-term. A buyer can build on the brand, which is something they will want to buy.
Pay Yourself a Salary
Having steady income as a solo business owner is vital, whether you’re selling or not. But some business owners want to push everything into the business, only taking what’s left. When you go to sell, the buyer will not be fooled by this practice.
When valuing the company, your buyer will use a tool called EBITDA or earnings before interest, taxes, depreciation and amortization to value your business. This essentially takes net income, adds back in interest, taxes, depreciation and amortization, to come up with a figure that your business makes in a year.
If you do not have a salary, the buyer will estimate one in the net income figure, taking it out as an expense. They want to understand what the profits are after all salaries are paid – including yours. If you’re not making a salary, then there’s not much for you to sell, after expenses are considered.
Boosting net income in the years prior to a sell, including incorporating a salary, will give the buyer confidence that there’s something worth purchasing, beyond a basic salary.
Handpick Your Buyer
The beauty of a solo business sell is that the owner can have a significant hand in how they want to transition the business. Do they have a successor in mind who they believe would do a wonderful job for their clients? Or do they want to train someone that can take over the business one day?
These options are open to the business owner – they just need to understand how different succession plans work.
Say the owner wants to handpick their successor and they decide to bring this person in as a partner. Now, the owner and partner can set up a buy-sell agreement that values the company today, when both the buyer and seller are in equal footing to negotiate. Either through a legal commitment or life insurance policies, the buyer can understand when and at what price they will receive full ownership of the business.
This prevents the seller (or their family) from being forced to agree to weaker sale terms because of a health concern or death.
The other option? Find a someone that wants the business and is willing to begin the sale immediately. In such a case, you will likely work through an installment plan.
Say there’s a private practice therapist selling their practice. They can sell to a group practice or a new therapist using the installment plan. This would require a down payment, then continued payments through the life of the loan – say 10 years. Along the way, the seller receives the payment plus interest.
It’s a great way to manage the tax impact of a sell, while also opening the number of buyers to a larger group of people.
This level of control is only gained if the owner takes a proactive role in thinking about the end of their business today.
That way, no matter what happens in life or the economy, you have plan for the asset that you spent much of your career building.