Selling what is likely the largest asset on your balance sheet could be quite simple, but it rarely is.
It’s likely the most important financial decision for your life – for your family, for your employees, and for your clients.
Whew, that just got complicated.
To step into the question a bit more, let’s think about the common questions that you’ll likely have along the way as a business owner, especially if you’re exiting your business on your terms:
- What are the options I should consider?
- Who are the key members of a deal team during a transaction?
- What will my key employees think?
- Are there tax strategies that I should plan for before the sale, or after the sale?
- If I have children in the business, what happens to their employment?
- If it’s important for my family to stay in control, how do I transfer the business to them?
- Will I have enough assets once I sell my business and pay taxes to retire on my terms?
How you answer these questions really impacts how much time it takes to sell your business. In this article, we’ll walk you through the necessary steps and considerations when selling your business. With the above questions in mind, you’ll be taking the first step in adequately preparing for selling your business…on your own terms.
5 Steps And Considerations When Selling Your Business
The steps below are not in any order, but depending on your answers to the questions above, the first step is usually a valuation.
#1 Know Your Business Value
Determining the fair market value of a business is a nuanced task. Different valuation methods, such as earnings multiples, discounted cash flow analysis, and comparable sales, may yield varying results. Additionally, the emotional attachment of the owner to the business can sometimes lead to overestimating its value, while potential buyers may seek to negotiate a lower price.
Valuing what is probably your most important asset is something that you should done annually, or more often.
Expected timeline for a business valuation: A few weeks.
#2 Deciding on Your Exit Path
As a business owner, you have two paths for selling your business:
- Keeping the business in the family (or with key employees)
- Selling your business to a third party
The larger a business is in value, the more often it’s sold to a third party.
Either way, deciding on the path for this step is relatively simple, and we’re guessing you already have a strong preference on which path is right for you.
Deciding on the implications of this path for you, your successors, tax matters, cash flow after the sale, and more – is what takes time. The desired path can have a lot of variations, especially if you’re selling on your terms.
And who doesn’t want to sell on their terms?
Deciding on the preference path: A few weeks.
Deciding if you can live with the implications of that path: A few months to a few years. Really!
#3 Tax and Legal Implications
The tax implications of selling a business will undoubtedly be complex and vary based on the exit path that you choose. When selling to a third-party buyer, the tax matters are relatively straightforward. Alternatively, when selling to a family member, key employee, or ESOP, the tax matters are anything but straightforward.
The same thing really goes from the legal implications in selling your business. There are the matters necessary to facilitate the closing of the sale, which are straightforward enough. What does get complicated is the estate planning concerns you may have with legal ramifications that NEED to be handled.
Deciding on the income tax consequences: A month to a few months, depending on your exit path.
The legal and regulatory landscape surrounding the sale of a business is multifaceted and can pose significant challenges for both sellers and buyers. Various legal considerations contribute to the complexity of the process.
Seeking guidance from tax professionals is crucial to optimize the tax impact of the sale and avoid unforeseen liabilities.
Deciding on the legal consequences for just closing the deal: A month.
Deciding on estate planning maneuvers that you’ll implement prior to closing: Four months and counting.
#4 Due Diligence By The Buyer
It’s no surprise that prospective buyers demand a comprehensive understanding of the business’s financial health.
A typical third-party buyer will look under every rock and around every corner when purchasing your business. Even once you’ve agreed on a price to sell, the follow up due diligence items discerned by a third-party buyer will often lengthen the sales process, and perhaps lower the value of the business or earn out. Just expect this!
When selling stock to a family member, key employee, or ESOP, the due diligence is still present but a lot less complicated and less exhaustive. This may be because the buyer knows the business to a greater degree, or that the buyer is more motivated for the transaction to happen.
Either way, due diligence often includes:
- Existing contracts, and
- Agreements (customer contracts, employee agreements, leases, and any other legal commitments)
The buyer’s legal team will conduct due diligence to ensure they are not inheriting unforeseen legal challenges.
Due diligence by a third-party buyer: Several months!
Due Diligence by a family member or key employee who’s a buyer: A few weeks.
Due diligence by an ESOP or ESOP Trustee: A few months.
#5 Employee Concerns, Especially Key Employee Concerns
The uncertainty surrounding a business sale can create anxiety among employees.
Rightfully so. After all, just like this is your livelihood, their position within your business is what they depend on.
Maintaining confidentiality while keeping key staff informed is a delicate balance, and even so, key employees rarely have much notice until the business is sold.
The problem is that the buyer often wants to retain key employees well AFTER the closing. Why wouldn’t they? If a business’s key employees all ‘retire’ when a business is sold, the value of that business will most definitely diminish. A smart buyer wants to avoid this! Therefore, most buyers want key employees retained.
And since you’ve had a good run with your key employees, and they’ve helped create your business value along the way, it’s up to you to adequately recognize and reward your key employees.
Retaining and rewarding key talent during and after the transition is crucial for the continuity and success of the business. It’s also crucial for you to exit on your terms for the value that you’re after.
Expect 3 to 6 months to work out the best way to retain and reward your key employees and do so well before a sale is discussed.
Start Preparing To Sell Your Business
Selling a business is undeniably complex, encompassing a myriad of financial, legal, operational, and emotional challenges. From the intricate task of valuing the business accurately to navigating the legal intricacies and addressing operational concerns, each step of the process requires careful consideration and experience.
Recognizing and understanding these complexities is the first step toward successfully navigating the sale of a business.
By approaching the sale with enough time, you as the buyer create an environment to control many of the practical concerns when selling, while maximizing the value of the business at sale.
If you’re thinking about selling your business in the next 5-7 years or want to simply get the conversation started, reach out to an experienced professional at Consolidated Planning about building your business value prior to your exit.
2023-165535 Exp. 11/2025
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of Andy Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
