THE modern-day versions of the kindly old doctors and business owners around Stockbridge, Mass., that Norman Rockwell loved to paint are finding that their plans to sell their businesses and retire on the proceeds must be delayed, if not abandoned.
Steven H. Goodman, chief of the SHG Financial Group in Melville, N.Y., said some owners regret not selling sooner.
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
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What options are there for small business owners having trouble selling their businesses because potential buyers can't secure financing? What are the advantages and drawbacks?
David Keator, whose family’s wealth advisory, the Keator Group, is located one town over, said the primary issue was not the decline in the value of their businesses — though the values have fallen, like those of most other small businesses — but banks’ hesitation to lend money. In one case, Mr. Keator said, a dentist client found out he would have to retain a 40 percent interest in the practice if he wanted to sell it, because the bank would not lend more than 60 percent of the selling price to a young dentist just out of school.
This situation is being repeated among small businesses, and sowing regret for what could have been: if only they had sold their businesses when they had the chance.
“People who wanted to sell their business three years ago are somewhat regretful,” said Steven H. Goodman, president of the SHG Financial Group. “But most of the people I know in those situations are working hard to run those businesses and keep them going.”
Still, business owners as varied as doctors, car dealers and manufacturers are having to make tough decisions about how best to realize the fruits of decades of labor. With tough standards for bank financing, sellers may have to find well-heeled buyers or finance a significant part of the deal themselves. Agreeing to be paid back over time is not ideal, particularly for someone who wants, or needs, the money now. But in many cases, sellers do not have a choice: they are sick, they have lost their drive or they do not have children who want to, or could, take over the business.
“One of the worst things that happens is they take their foot off the gas and the business decreases in value,” said Barbara Taylor, an owner of Synergy Business Services, a business brokerage in Rogers, Ark., who also contributes to the small-business blog of The New York Times. “You’re not doing yourself any good by hanging on to it if you’re not able to run it. It’s better to go out and sell it now than end up with an unsellable business.”
How small-business owners manage this process is going to have a tremendous impact on their ultimate level of wealth. But making the decision may seem less overwhelming if you see it through the lens of the old Wall Street ratings systems: sell, hold or buy.
SELL The one major advantage of selling a small business now is the tax rate. It is likely to go up — most advisers are predicting the capital gains rate will rise to 20 percent, from 15 percent, in the next year or so. While the price you get for your business today is probably lower than it was during the boom and lower than it may be in a few years, your after-tax profit could be higher now than if you wait and the tax rate is increased.
But what is the business worth? That can be an emotional question. Many business owners do not want to believe, any more than homeowners do, that their companies are worth less now. If anything, the attachment to a higher value for the business may be stronger because of all the time people put into building and running their company.
“You’re getting some car dealers saying, ‘I will sell and I want X because I could have gotten X four years ago,’ ” said Thomas Hayes, who runs an automotive brokerage focused on the Northeast. “They’re not going to get back to the crazy prices of four to five years ago.”
One solution for the owner who needs to sell at least part of his business is to use an employee stock ownership plan, said Ed Mooney, senior vice president with the wealth strategist group at BNY Mellon. These plans allow the existing management to borrow money to buy a portion of the business and use those funds to pay the founder.
“They’re becoming more prevalent because some other forms of financing are not available,” Mr. Mooney said.
Mr. Mooney said it was easier to set up an employee stock ownership plan for businesses with inventory and a long history of sales than for an advisory firm or consultant.
Of course, if the goal is to pass the business on to family members, this is actually a great time. An owner could sell interests in a family limited partnership or a limited liability company and take advantage of the lower value of the business — and the taxes associated with the sale, Mr. Mooney said.
HOLD What exactly would you do with the money you received from selling the business? If you don’t have an immediate need for the cash, this may be an argument for holding on.
“That transition to having a pile of money and not having the revenue of your company is not an appealing transition right now because of the distrust of Wall Street,” said Shawn Rubin, a managing director for the wealth management division at Morgan Stanley Smith Barney.
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