There are an estimated 31 million U.S. entrepreneurs, with more businesses created every year. At any given time, a number of those business owners will consider a liquidity event.
To be sure, there are several reasons an owner may want to consider a sale, including high multiples, retirement, lack of succession, liquidity needs, death or divorce.
But outside of these good reasons to sell, entrepreneurs and their financial advisors should have a serious discussion on whether a sale makes "life sense,” recognizing that there are many moments when a client’s sale of their business is asking for unnecessary trouble.
Indeed, after advising numerous entrepreneur clients over several decades, I have witnessed the inherent challenges of a liquidity event, and have 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 manage your company efficiently, while simultaneously focusing on all the elements of a sale. The pressure of juggling both arrangements can fracture families, marriages and partnerships. It can also ultimately tank a deal if a lack of attention to fundamentals affects the business’ valuation.
Wealth management firms and family offices can best serve their entrepreneur clients by carefully walking them through a number of key considerations in determining whether a sale of the business is a truly good choice for them.
Go Beyond The Numbers
In general, there are two litmus tests to determine if a liquidity event makes the most sense. First, and perhaps most obviously, 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 let the business go?
In particular, will a liquidity event improve their quality of their life and the lives of loved ones? On the flip side, will such a transaction adversely affect their relationships with a spouse, kids, family and friends? And are they prepared for new complexities to emerge with multi-generational wealth planning.
Emotional Losses
Sometimes, the proceeds from selling a business aren't worth the unintended consequences of sudden wealth. If a profitable business provides the entrepreneur with a sense of purpose and a reliable cash flow, severing that tie could create an unmoored feeling that cascades into multiple other areas of their life.
For younger business owners, generating significant liquidity can make it difficult to incorporate the new wealth into a meaningful and purpose-driven life. It could be tempting for them to attempt to solve problems with money and become insulated from learning how to problem-solve, adapt or compromise.