Key Considerations When Selling Your Business
- Erik James Roberts, Founder & Chief Investment Officer | Infinitus Wealth Management
- May 6, 2022
- 5 min read
At Infinitus Wealth Management, we specialize in helping business owners prepare to sell their business, guide them through the process, and invest the proceeds while you decide what's next.
For many small to medium-sized business owners, the eventual sale of their business is an integral part of their retirement planning.
For many small to medium-sized business owners, the eventual sale of their business is an integral part of their retirement planning. The two key determinants of business transition success are leaving enough time to plan and having an adequate plan. While that may seem obvious. 60% of family business owners say they have business succession plans; however, most are informal.
The best strategy is to plan long before the target date of a sale. If you plan to sell to a third-party buyer, at least three to five years usually allows for enough time to prepare the business for sale and allow for a series of negotiations. If you are selling to an employee or passing along to your family, it also allows for time for training and any transition process that needs to occur.
Whether you are contemplating transferring ownership interest to your family members, selling your ownership interest to current management, an outside party, or liquidating assets, review these steps as you think about your business succession plan.
Determine What You Want for Your Business
How you transition your business depends a lot on your situation. For example, where do you want to be in three, five, or ten years? Do you want to remain involved with your company? Maybe you are ready to redirect your entrepreneurial energies toward philanthropy or enjoy a well-earned retirement.
You will also need to consider your employees, suppliers, and key customers. If you have been intimately involved in your business and the relationships you have established with the stakeholders are the core of your business, it is crucial to present and time the communication of your planned transition appropriately.
Assemble Your Advisory Team
Regardless of your eventual transaction's complexity and total size, you may want to engage legal counsel, an accountant, an investment banker or business broker, and your Financial Advisor. For example, suppose you consider transferring your business ownership and interests from your estate to your family. You will likely not need an investment banker or business broker—but an outside business appraiser would still be suggested.
Choose an attorney well-versed in purchase and sale agreements and wealth transfer details. You likely already have an attorney you work with on contracts, litigation, and other legal issues, but it is good to find an attorney specializing in business succession.
Your accountant should have extensive experience minimizing the tax impact of monetizing or transferring a business. For example, an investment banker, business broker, or third-party business appraiser will analyze your business and the competitive environment to arrive at a realistic valuation. These professionals can also provide valuable input in structuring your transaction.
Finally, your Financial Advisor is there for the big picture. They will understand your succession in the context of your overall financial picture and can help protect the connections between your personal objectives and business ambitions.
What Is Your Business Worth?
Determining the value of your business is frequently one of the most challenging aspects for any business owner when considering exiting their business. Sometimes, a true and accurate valuation is difficult to gauge after all of the time and effort put into the business.
Begin by commissioning your investment banker or business broker to analyze the market environment. For example, you are looking for the pool of potential buyers and what they are looking for in an acquisition target.
Your investment banker or business broker should also develop alternate strategies to consider—beyond simply selling your business to a potential buyer. For example, many business owners have made their successful departure through a sale to a private equity firm or an employee stock ownership plan (ESOP), and other business owners have unlocked liquidity through a recapitalization of the business.
By exploring multiple exit strategies, each of which has its pros and cons related to the details of each route, you can sometimes expand your pool of possible buyers or investors and realize significant value from your transaction.
Update Financial and Estate Plans
Do not wait until eventual negotiations to realize that you should have updated your financial plan. Instead, take the time now to consult with your CPA, attorney, and Financial Advisor about how much you will need to achieve your retirement goals or pursue whatever you plan to do once you have made your exit.
You should also consider this opportunity to review estate planning issues beyond your will with your estate attorney. If necessary, update the way your personal and business assets are titled, if necessary—and remember that it may take significant time to implement the complex strategies used to transfer assets and minimize your tax liability.
Keep Growing your Company
Finally, keep focusing on growing the company to increase its valuation and creating a cash flow machine that buyers can envision taking over with minimal changes. If you are transferring your business, this is the time to complete any gifting strategies that you and your advisory team have formulated.
Identify your growth levers and push them full speed ahead. To maximize the attractiveness of your business, identify what drives growth and focus your attention accordingly. For example, if you have partners, not on board, consider a strategy where you or the business would buy out their equity stake. Uncommitted owners can be challenging to a successful sale.
No matter how long your time horizon is to transition your business, the time to start planning is now. Talk with your Infinitus Wealth Management Financial Advisor today and start the conversation.
At Infinitus Wealth Management, we offer a complimentary, no-obligation portfolio review for investors who want an independent fiduciary second opinion on how their capital is actually being managed.This is a conversation, not a sales process. If your portfolio is already well constructed, we will say so directly. If we identify avoidable costs, unnecessary concentration, tax inefficiencies, or portfolio structure that may be working against you, we will show you specifically where those issues exist. From there, you decide what to do with the information.
Important Disclosures
Infinitus Wealth Management is a registered investment advisory firm. This article is provided for educational and informational purposes only and does not constitute investment, tax, legal, or accounting advice. It is not an offer or solicitation to buy or sell any security or to enter into any advisory relationship. Any references to specific strategies, withdrawal rates, tax provisions, or historical figures are general in nature and may not be appropriate for any individual investor.
Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Tax laws are complex, change frequently, and have unique application to individual circumstances; please consult a qualified tax professional regarding your specific situation. Social Security rules, Medicare rules, and retirement account regulations are subject to legislative and regulatory change.
The information in this article was believed to be accurate at the time of writing but is not guaranteed. Readers should consult with their own qualified advisors before making any financial decisions specific to their situation.
