Key takeaways

  • Start planning for the sale of your business years before you anticipate it happening.

  • Four areas to address before starting the sale process is assessing your readiness, identifying who will be impacted by the sale and how, setting your objectives for the sale, and making sure you have the right advisors in place to help you assist you through the process.

If you’ve built a successful business, it’s never too early to begin thinking about succession planning, even if you anticipate that the sale of your business is years away.

Your business, and the value you can derive from it, is likely to play a critical role in determining your long-term financial security. It makes sense to prepare in advance for the time when you’ll either be courting buyers or receiving offers from potential purchasers.

The decisions you make when you’re transitioning a business can have a significant impact on your employees, your clients, your family and the communities you serve.

Advanced planning is critical to help you:

  • Assure the full value of the business
  • Consider all the options available to you to transition the business
  • Prepare for the tax consequence
  • Protect the interests of family members, key employees or the communities in which your business operates.

A wide range of issues should be explored in depth as you determine the most effective strategies to pursue. Addressing the following four factors can help you better prepare for the full impact of a business sale.

 

1. Assess your readiness to sell your business

Like many business owners, your daily life is probably closely intertwined with the operation of your business. Nobody is likely to match your passion to make it a success. One of the most difficult challenges for many business owners is to find the willingness to “let go” and allow someone else to take charge.

Here are a few issues to consider as you determine if you’re in the right “state-of-mind” to begin the business transition process.

  • Your legacy. Whether you built your company from the ground up, assumed leadership from a previous generation of your family or purchased the business from a third party, there’s more than a financial reward at stake when you sell. Your company’s reputation has been hard earned and is not simply an asset to be monetized. You need to feel confident that the time is right to hand over the reins to someone else who is properly prepared to take over leadership.
  • Your life after the sale. It’s common for business owners to struggle with the transition to life after work, even more so than those who retire from work as an employee. Have you determined what you’ll do with your time when your business is no longer is part of your life? How will you fill your time in a way that will be satisfying for you? Will it make sense for you to stay involved in the business on a limited basis? These are important factors in deciding your readiness level.
  • Succession plans. To position your business for success after your departure, you may want to identify candidates who can take over your leadership and management responsibilities. Or you may need to consider that a third party may acquire your business. If that’s the case, an outside buyer must demonstrate the required expertise and have access to necessary resources to run the company. Finally, the role of key employees and managers should be recognized, as they are significant contributors in making the business an attractive acquisition target.

 

2. Identify stakeholders

The decisions you make when you’re actively running a business can have a significant impact on your employees, your clients, your family and the communities you serve. The same is true when you’re transitioning out of a business.

While your primary focus is to make sure you obtain the value you need to meet your objectives (such as retirement or to invest in another business), your best transition strategy will try to account for stakeholder concerns as well.

Considerations when it comes to stakeholders include:

  • Family members. Depending on the level of involvement family members have in the business, they may be the most sensitive stakeholders with which you have to contend. You’ll need to account for how the sale will impact your spouse, children or other family members’ financial security. You’ll also need to factor in how a sale could affect your relationships. These dynamics can be one of the most complex matters during the transition process, depending on your family’s involvement in the business, and require careful handling and sensitivity.
  • Employees. After family members, the interests of your employees should be a priority. Any employees who already have an ownership stake in the company may be in a position to financially benefit from the sale. If a third party buys the firm, a concern among current employees will be their ongoing status within the organization and whether their opportunities for future advancement will be affected. Be prepared for employees to be apprehensive about the news of an impending sale if an outsider takes the reins and try to take meaningful steps that will reassure them.
  • Community. Selling a business can be significant at the community level, particularly in smaller towns. If there’s a risk that a buyer could downsize the workforce or move operations to another location, the impact on vendors and businesses that serve the needs of employees could be dramatic.
  • Clients and customers. They may not expect changes in the quality of products or services as ownership changes. You’ll want to try to preserve those relationships as you plan the transition.

 

3. Set objectives

Like any key financial goal in your personal life, it’s important to understand the primary objectives you’re trying to achieve in selling your business. What is it you hope to accomplish, both financially and personally, by stepping away from managing the business? And what are concerns that need to be addressed to help make sure your objectives are met?

Here are some of the key issues to consider.

  • Valuation. A prime objective for most business owners preparing for a sale is to obtain the full value for the business. The most challenging part is to determine exactly what that may be. You need to understand the potential market of buyers for your company. This could include competitors looking to make a strategic acquisition or those who see it as an investment, such as private equity firms. Get details on factors that can affect business valuation.
  • Tax impact. As with most financial transactions, there are potential tax ramifications that can affect you, key employees and buyers. Tax liability can vary based on whether you sell stock or assets and whether you receive substantial payments under an employment contract or a noncompete agreement. Transfer taxes may also apply if you transfer ownership shares to a family member and/or charities in advance of the sale.
  • Employment status. If you want to stay involved in the business, you may want to consider an employment contract with the buyer. Buyers may also require that certain senior staff be committed to staying with the firm for a period of time. This often entails a formal written contract, which can be designed to protect the interests of key employees for at least a period of years.
  • Asset protection strategies. A key goal for many business owners is to protect their financial legacy after the sale is completed. Ownership structure is a critical consideration, especially if children or grandchildren already have an ownership stake or any family members will retain an ownership stake after the sale. A priority is to protect wealth that’s ultimately transferred to family members from potential threats such as divorce, lawsuits or other asset claims. You may want to consider establishing irrevocable trusts and funding them with ownership interests prior to selling the business.

 

4. Select advisors

Selling a business requires in-depth knowledge of your financial priorities, along with expertise related to this type of transaction. It may require the support of advisors or specialists who can contribute additional insights to the process.

You’ll want to consider:

  • Your current accounting, legal and tax advisors. Even if they have limited knowledge specific to business sales, their personal knowledge of you and your business will likely be beneficial. They can also help you identify other trusted advisors.
  • Valuation professionals. An outside valuation service may be able to provide a more objective perspective on the value of your business. This may be particularly true if you own a larger company, your business is subject to certain regulatory requirements, or it has outstanding loans.
  • Legal professionals. Your current attorneys can be put to work on matters like estate planning or contract. Other circumstances, however, may benefit from an attorney who meets more specialized needs.
  • Trustees. If a portion of your company is owned by an irrevocable trust or you decide to transfer ownership to a trust prior to the sale, you’ll need to select a trustee or co-trustees to oversee key responsibilities.

 

Starting the process

When the time comes to explore your options for transitioning your business to a new owner, the experienced Business Owner Advisory Services team from U.S. Bank Wealth Management can help you evaluate options, establish a timetable for action, market your business to potential buyers, and represent your interests in the transaction.

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