Let’s say you have built a successful business over the years and you’re starting to think it’s time to exit. It may seem straightforward – sell the business and enjoy the fruits of your labor! You may be thinking about selling the business yourself. After all, you undoubtedly understand the management and cash flow of your business, and have learned a lot about the legal and tax nature of operating your company. However, the end game is very different and something most business owners have never experienced before.
As the saying goes, “if you are representing yourself, then you have a fool for a client.” Consider that you only have one chance to monetize your life’s work and maximize the return on all the time, effort and capital you’ve invested in your business.
Below are questions and considerations that every business owner must think about when planning for the sale of their business. Before a potential buyer asks you these questions, you must first ask them yourself:
- What attributes are most value added/destroying from the buyer’s perspective?
- Who are the potential buyers for your type of business?
- How is the market currently valuing your type of business?
- How are you going to sell the business (e.g. via a proprietary transaction or via a competitive bidding process)?
- What type of transaction is best (e.g. a stock sale, an asset sale, a 338(h)(10) election)?
- Should you re-characterize the entity’s legal form for tax purposes (e.g. C Corp., S Corp., or LLC)?
- What representations and warranties, covenants, indemnification cap and period, basket size and type, and escrow/holdback amount and period should you seek in the final purchase agreement?
- What happens to the benefits you once received as an owner?
Build a Team of Professionals to Assist with the Sale of Your Business
If you can’t confidently answer all of these questions, you may need some help with the sale of your business. A team of qualified professionals can help you answer the questions above, as well as many other detailed questions that will arise during a transaction of this nature. Such a team adds significant value by protecting your interests and helping you prevent financial mistakes. Your team of transaction advisors should consist of the following:
- A CPA familiar with your business
- Legal counsel with a mergers & acquisitions (M&A) specialization and experience
- A FINRA licensed and registered investment banker and M&A advisor
- A wealth management advisor
The Pre-Transaction Stage of Selling Your Business
The pre-transaction phase of your sale may be stressful and sometimes last longer than anticipated. Market conditions change, buyers’ appetites vary, and tax legislation is often revised. It is not uncommon for a business owner to disagree with the valuation of their business, but a seller must do his or her best to separate the value of the business from personal biases. In addition, in the pre-transaction phase, it is critical the business owner address personal financial considerations prior to the sale, such as:
- Life insurance coverage
- Retirement plan conversions
- Non-qualified plan distributions
- Healthcare expenses
- Non-deductible expenses after sale
- Disability/long term care insurance coverage
- Exiting employer sponsored equity benefit plans
So where do you start? A good business owner should complete an objective self-assessment prior to the sale. This assessment is specific to each person as a business owner and is meant to assess their unique qualities, objectives, likes, dislikes, strengths and weaknesses. For example, is your main objective in the sale of the business to achieve a smooth succession, fund a certain lifestyle, create a social impact, leave a legacy, or something else? You should have a clear picture of your goals and objectives before your business is put up for sale, as they will help guide you in many of the decisions you have to make during the sale process.
Taking this comprehensive approach and teaming with the right experts who are experienced in asking the right questions at the right time can make the post-transition phase of owning a business the reward it is meant to be.