Author Topic: Advice on whether to sell my business  (Read 760 times)

nara

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Advice on whether to sell my business
« on: October 14, 2018, 11:40:23 AM »
I have been self employed for 6 years. The business has been our sole source of income for the last few years. The first few years it was just me as a solo practitioner working part time and then my husband joined and it has grown steadily from there. We moved to an office location 2.5 years ago and now have 8 full-time employees. Our income is around 160K after taxes.

Our commercial lease ends in 2 years and I am seriously considering exiting the business by then. I enjoy the money, but it is still a full-time job and after having worked part-time for so many years, I feel imprisoned by it. Even when I am on vacation or working from home, I still can't relax as long as the office is open. I find it highly stressful managing employees. As we grow all of this just becomes more complicated and I just feel in over my head. I really miss being a solo practitioner and having my part-time schedule and only having to worry about me and my own clients.

I struggle with this because we are not yet FI. My husband (who has very little involvement in the business anymore) thinks instead of selling it, I should transition out as much as possible after the 2 years and try to make it a passive income stream for as long as possible. I like this idea, but don't believe it will ever be the type of business that can be passive. Our industry is in the medical service field (kind of like me being a dentist and having my own dental practice) and it requires having licensed professionals "aka dentists" practicing. Whenever we lose a "dentist" I would have to be pulled back in to cover for them and can be thrown into full-time work at anytime while I have to search for months for a replacement. In other words, I would still always be the mercy of the business and our employees because it is all still my responsibility. And I would always be concerned about how the business is functioning and the quality of care. My employees may become resentful of me and there is always the concern that they could just open their own practices and take all of my clients, which they are allowed to do in medical care industries. I would still be fully liable for everything that takes place under the business. But I would always have the business to fall back on for as long as it's open.. and I have spent a lot of time and energy building this business. I could hire a team of admin people to delegate my work to and I could work very part-time. I could grow the business and potentially sell it for a lot of money. All of my staff are graduate students pursuing their license and that means in a few years I could potentially have a pool of more independent and profitable employees than I do now (although a very green one).

My other option would be to sell the business to a key employee. This employee has been with us since we opened our office and has been trained by me and received her license a few months ago. She has an interest in starting her own practice one day. While most medical practices are hard to sell because they are usually built on the clientele of the practitioner who opened it, she is the most likely to take over because our clients know her and trust her. We would not be able to sell for much (maybe $100k) because she doesn't have much capital--but she is likely the only person who would be able to take over the business without any major disruption. I would also offer to work part-time for the business for 1-2 years after the buy-out which would give us both more security as I have a decade more experience over her.  If she were to leave the business before we sell, I believe we will miss the boat and may not be able to find someone as qualified willing to buy it at least not at its current size.

This is the big decision I am currently struggling with. I know that if I were to sell the business in 2 years, I would still need to work..but I don't believe I will have difficulty finding work and I can always work myself as a solo practitioner again. What would you do? I love being self employed--but I don't love running a business. Knowing this should I take advantage of this situation and allow this employee who has been with us since the beginning to take over the business? Or should I be more concerned about reaching FI first and unload the business at a time where I don't have to be as concerned about our livelihood?

lhamo

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Re: Advice on whether to sell my business
« Reply #1 on: October 14, 2018, 12:00:50 PM »
It sounds like selling the ownership interest of the business to your employee and continuing to work for her PT is the most win-win scenario -- even better if her buyout can be structured so that you get the payments over time and can optimize your own tax planning. 

What would a five year transition plan look like?  Maybe a decreasing workload on your part and an increasing payment from her?  So:

Year 1:  You drop work hours to 80%, she buys into the business at 10%
Year 2:  You drop work hours to 60%, she buys another 15% of the business
Year 3:  You drop work hours to 40%, she buys another 25% of the business
Year 4:  You drop work hours to 20%, she buys another 25% of the business
Year 5:  You drop to whatever # of hours makes sense for both of you, she buys the remainder of the business

CowboyAndIndian

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Re: Advice on whether to sell my business
« Reply #2 on: October 14, 2018, 01:27:59 PM »
.... We would not be able to sell for much (maybe $100k) because she doesn't have much capital--but she is likely the only person who would be able to take over the business without any major disruption.
...

I do not know how the price for such a business is valued at. But, $100k price for something generating $160k/year is abnormally low.

You usually sell a business for multiples of yearly income. Say 3 times or so, so, in this case,  the actual price is $480k.

The person you are selling to does not need to have $100k to buy the practice. They can finance the amount.

Seriously, get a professional to guide you in selling the business.

calimom

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Re: Advice on whether to sell my business
« Reply #3 on: October 14, 2018, 02:48:34 PM »
.... We would not be able to sell for much (maybe $100k) because she doesn't have much capital--but she is likely the only person who would be able to take over the business without any major disruption.
...

I do not know how the price for such a business is valued at. But, $100k price for something generating $160k/year is abnormally low.

You usually sell a business for multiples of yearly income. Say 3 times or so, so, in this case,  the actual price is $480k.

The person you are selling to does not need to have $100k to buy the practice. They can finance the amount.

Seriously, get a professional to guide you in selling the business.

Depending on the business, value is generally factored at a multiple of 3X the net, not the gross. So if the net is $50K per year, the value of the busienss is likely $150K. And there could be other considerations such as equipment, vehicles, computers and such.

I don't think there are very many very small businesses that flourish without a hands-on, involved owner/manager. This is the case in my business, I have to stay pretty close to it. OP, you sound burnt out and like someone who never wanted to manage people. Does the employee you're consider have good management and administrative skills? That's pretty key. You could look at some scenarios where you sell to her with a promissory note and they could make payments for 3 to 5 years.

Does your DH work outside the business now? You mentioned he was active and now he's not.

nara

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Re: Advice on whether to sell my business
« Reply #4 on: October 14, 2018, 04:53:35 PM »
It sounds like selling the ownership interest of the business to your employee and continuing to work for her PT is the most win-win scenario -- even better if her buyout can be structured so that you get the payments over time and can optimize your own tax planning. 

What would a five year transition plan look like?  Maybe a decreasing workload on your part and an increasing payment from her?  So:

Year 1:  You drop work hours to 80%, she buys into the business at 10%
Year 2:  You drop work hours to 60%, she buys another 15% of the business
Year 3:  You drop work hours to 40%, she buys another 25% of the business
Year 4:  You drop work hours to 20%, she buys another 25% of the business
Year 5:  You drop to whatever # of hours makes sense for both of you, she buys the remainder of the business

I really like this idea. However, attorneys in the past had advised us against any type of partnership or long term buy-out. It is worth looking into again since I am extremely burnt out but not feeling 100% ready to sell either.

nara

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Re: Advice on whether to sell my business
« Reply #5 on: October 14, 2018, 05:05:09 PM »
.... We would not be able to sell for much (maybe $100k) because she doesn't have much capital--but she is likely the only person who would be able to take over the business without any major disruption.
...

I do not know how the price for such a business is valued at. But, $100k price for something generating $160k/year is abnormally low.

You usually sell a business for multiples of yearly income. Say 3 times or so, so, in this case,  the actual price is $480k.

The person you are selling to does not need to have $100k to buy the practice. They can finance the amount.

Seriously, get a professional to guide you in selling the business.

A business like ours is not valued based on revenue x2. Because we are a medical practice highly dependent on me being both the owner and practitioner, our business is valued based on EPITDA. It is assumed that if I were to sell to another owner, that most of the clients would leave. Actually, I had met with a lawyer a year ago who told me that I had nothing to sell at all other than "a couple computers". If we were to value the business based on revenue our revenue is at 500-600k a year, but we have less than 10 clients which makes our business pretty volatile and risky for a new owner to come in. So I would honestly be happy to sell it for $100k to a current employee who helped me build it by increasing my profits over the last few years.

nara

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Re: Advice on whether to sell my business
« Reply #6 on: October 14, 2018, 05:22:50 PM »
.... We would not be able to sell for much (maybe $100k) because she doesn't have much capital--but she is likely the only person who would be able to take over the business without any major disruption.
...

I do not know how the price for such a business is valued at. But, $100k price for something generating $160k/year is abnormally low.


You usually sell a business for multiples of yearly income. Say 3 times or so, so, in this case,  the actual price is $480k.

The person you are selling to does not need to have $100k to buy the practice. They can finance the amount.

Seriously, get a professional to guide you in selling the business.

Depending on the business, value is generally factored at a multiple of 3X the net, not the gross. So if the net is $50K per year, the value of the busienss is likely $150K. And there could be other considerations such as equipment, vehicles, computers and such.

I don't think there are very many very small businesses that flourish without a hands-on, involved owner/manager. This is the case in my business, I have to stay pretty close to it. OP, you sound burnt out and like someone who never wanted to manage people. Does the employee you're consider have good management and administrative skills? That's pretty key. You could look at some scenarios where you sell to her with a promissory note and they could make payments for 3 to 5 years.

Does your DH work outside the business now? You mentioned he was active and now he's not.

I doubt the value of the business is that high. I was told that our business is valued based on EPITDA which would be a lot less than 2-3x net profit. This is because it is a medical practice highly dependent on me as the owner/practitioner. I would need to sell it to another medical practitioner with the same license as mine or a buyer who was willing to take a much lower profit in order to hire someone with the required license needed to bill insurance. I have been told by a lawyer that there is nothing to sell and by some professionals in my field who have sold their own business that we are too small to sell (i.e. anyone can get an office and 10 clients). We would need to have a minimum of $1 mill in revenue to really be taken seriously. Right now we are about half that and it would not be easy to grow to double in 2 years.

My husband was active in the business but we are over-staffed so he may only work a few hours per week. He is "on-call" in case staff are out sick or need to leave early and we're suddenly short-staffed, etc. If we were to lose an employee he would take over their full-time position until we re-hire. This is another area where we lose on opportunity cost because he needs to be available and therefore can't have a full-time job. But is important because we have a very small client base (less than 10 clients) and reliability is especially important.

hops

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Re: Advice on whether to sell my business
« Reply #7 on: October 15, 2018, 06:42:44 AM »
You have mentioned your credentials and field of work in previous threads, so I'm basing this comment on that information:

A couple years ago a family friend retired from that field, albeit not in your part of the country, which could potentially change things. He didn't have any employees who were interested in purchasing his business and found that it was valued fairly lowly by bigger companies. He simply referred his clients to trusted colleagues and called it a day. If you could work out a sale to the key employee, I'd strongly consider it.

nara

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Re: Advice on whether to sell my business
« Reply #8 on: October 16, 2018, 10:16:33 AM »
You have mentioned your credentials and field of work in previous threads, so I'm basing this comment on that information:

A couple years ago a family friend retired from that field, albeit not in your part of the country, which could potentially change things. He didn't have any employees who were interested in purchasing his business and found that it was valued fairly lowly by bigger companies. He simply referred his clients to trusted colleagues and called it a day. If you could work out a sale to the key employee, I'd strongly consider it.

That is very true. However, us smaller companies can also sell to medium sized companies that want to grow. Once a company is at 1 million in revenue it is much more likely to get the attention of the larger companies who want to acquire it for a much larger price tag. 

calimom

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Re: Advice on whether to sell my business
« Reply #9 on: October 30, 2018, 07:44:35 PM »
@nara I just saw on another thread you have a windfall from the sale of your business? Would love an update on how the sale went and did you feel it was a fair transition. Did you sell to the employee and are you continuing to work there? Inquiring minds want to know! It sounds as though congratulations are in order!