The Business Owners Pre-Sell Plan

by Tom Kerchner

Five Areas of Preparation Before Selling Your Business

Selling your business is a big decision that most people do only once in their lifetime.  For this reason, it pays to do it right, and like most important decisions, it requires planning to achieve your goals.  There are five key areas to consider before selling: Personal Goals, Financial Planning, Business Goals, Tax Planning, and Business Preparation.

Ideally, the planning process starts several years before you sell.  If you find yourself thinking sooner than later, even a few months of preparation can go a long way to achieving success.

Personal Goals

This is a good time to reflect on what you want to be doing one, two, or five years after selling.  Selling your business rarely means instant retirement. In fact, there are a number of options you can choose, including full or part-time employment, consulting, reduced responsibility, or transitioning into full-time retirement.  Retaining some ownership is another possibility. If you have children working in the business, you will want to think about how a sale will affect them and how you approach the subject of selling.  Depending on your desires, these issues can impact how you prepare your business and the type of buyers you pursue. 

Financial Planning

Work with a financial advisor and have a plan that addresses your post-sale financial needs.  How will you adjust to the loss of regular business income, and will you be able to maintain your lifestyle?  Are the sale proceeds needed for a comfortable retirement?  If so, then you have to think about how much is needed versus the current estimated value of your business. An M&A advisor or business valuation professional can help determine the likely value of your business.  Other financial considerations include determining how the funds will be invested, tax-saving strategies, charitable giving, and setting up trusts or other means of transferring wealth to family members.

Business Goals

What happens to your business and employees is a major concern for most business owners.  Is keeping the business independent and your current management team running the company important to you?  If so, this may preclude certain buyers.  On the other hand, combining your business with a larger organization could present new growth opportunities and advancement for employees.  These goals are sometimes but not always mutually exclusive.  Another key aspect is culture fit.  If part of your legacy and business success is tied to your organization’s culture, you will want to find a buyer who shares your beliefs and values. Quality businesses will attract multiple buyers. Those buyers will have different plans and cultures, so having realistic business goals will help you select the best buyer.  

Tax Planning

Business sales can be taxed as corporate taxes, personal ordinary income taxes, capital gains taxes, and possibly all three. How the company’s legal entity is structured can have an enormous impact on your tax bill, and this entity structure needs to be considered when structuring a sale.  Classic “C” corporation shareholders are subject to double taxation if the deal is structured as an asset sale, while double taxation can be avoided if the stock is sold.  “S” corporations and other pass-thru entities generally don’t have this issue.  Sellers usually prefer Stock Sales to minimize taxes.  In a Stock Sale, the buyer purchases the shareholders’ stock and acquires ownership of the seller’s legal entity.  Buyers prefer Asset Sale transactions to minimize liability and maximize future tax write-offs.  In an Asset Sale, the seller retains possession of the legal entity, and the buyer purchases individual assets of the company, such as inventory, equipment, fixtures, leaseholds, licenses, goodwill, trade secrets, trade names, customer and vendor contacts, and intellectual property.  Where asset sales are agreed to by both parties, sellers need to understand purchase price allocation and its effect on taxes.  There are also strategies for deferring taxes either within the deal structure or thru vehicles such as trusts. Having a good tax advisor and a pre-sale understanding of taxes will be critical to your personal financial plans.

Business Preparation

Preparing your business to sell involves looking at all of the aspects of the company, but the key areas making the biggest impact with buyers are financial health, management and staff, customers, and the quality of intellectual and/or physical property.  Financial health includes revenue, income, trends, quality of financial statements, and working capital management.  A strong management team with the capability to lead the organization without the owner opens many more sale options and improves value.  High-quality customers increase value while customer concentration is perceived as risky and not only reduces value but decreases the available pool of buyers.

Business sales are often thought of as a financial transaction, but the truth is for most business owners, the sale of their business is financial, emotional, and personal.  The longer business owners take to plan their eventual exit, the better the results will be.  Preparing a pre-sell checklist and assembling a team of advisors will give you a roadmap, knowledge, and assistance needed to maximize your success.  

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