Selling a business is one of the most rewarding—and overwhelming—experiences for an owner. Even if you’re eager to try something new or spend more time with family, a business is typically intertwined with your identity—and often your family’s as well. Many business owners are surprised by the volume of things that need to be considered, compiled and executed during the process of a sale.
If you’re starting to think about a business transition, here are five things you should know beforehand in order to sell on your terms.
1. Give Yourself Enough Time to Prepare
How long? 2–3 years is good; 3–5 years is better.
There is a lot of thought, preparation and emotion that goes into selling a business. Owners tend to underestimate the amount of time it will take to get their business in shape for a potential buyer while they also continue to oversee business operations and growth.
Once you start to feel the desire to sell, give yourself at least two to three years of runway. The more thorough you can be in the presentation of your business, the better chance you have of maximizing its perceived value.
Potential buyers will consider a range of factors when looking at a purchase. The current market environment will determine price, but there are other variables that can influence overall attractiveness. And fortunately, these are variables you can control. We call these “presale planning techniques,” and I will touch on these more later in this blog.
It’s also important to give your family members and employees enough time to process a possible sale without the added pressure of a tight deadline. We recommend having a communication plan in place to address family, key employees, and even clients or vendors. Our Private Wealth advisors work with owners to develop a business continuity plan that can help define an owner’s wishes and address all the areas that will be affected by a sale.
2. Leverage the Estate and Gift Tax Exemption Before It Sunsets
The 2023 federal estate and gift exemption is at a historic high. Currently, the exemption amount allows for the transfer by lifetime gift or at death, or a combination thereof, of up to $12.92 million per person ($25.84 million for a married couple) before the 40% transfer tax applies. However, the tax law that allows for this high exemption is set to sunset at the end of 2025, so time is running out to take advantage of this opportunity. If this tax law does sunset, the new exemption amounts are projected to be $7 million per person and $14 million per married couple. Our team works with business owners to develop estate tax planning strategies based on their customized goals and objectives.
3. Complete a Thorough Presale Plan
When a business owner is starting to think about an exit, we suggest they walk through a presale planning exercise. This addresses areas within their business that will help them prepare for a smooth transition.
Let’s review some presale planning categories in more detail:
Management Team: The management team becomes even more critical once the owner exits. These are the folks who will continue to run a quality operation and engage in future growth. I often see owners utilize strong incentive plans that are tied to performance metrics with vesting/handcuffing features. It’s also important to find a way to communicate the transition plans to the team when the time is right.
If the business has what we call “owner dependence,” that could cause a challenge during the transition phase. The absence of the owner should be minimally disruptive to the business once the owner is at the point of exiting. If there is owner dependence, we advise that owners focus on training or recruiting key employees who can begin to take over the day-to-day operations.
Financials: When a buyer is analyzing the financials of a business, it’s best if the owner has engaged with a professional, such as a CFO or controller, who has been managing the financials. If a review or audit of the business has been completed within the past one to two years, that’s even better. This helps instill confidence in the financials of the company and helps a buyer review accurate documents.
Documentation: Strong documentation is critical in presale planning. This is about getting your ducks in a row. When you consider your documentation, start by pulling them into categories to help you get organized. Common areas we review are:
- Governance – meeting minutes, bylaws and organizational charts
- Strategy – business plan, core values, marketing and sales
- People – performance reviews, incentive plans and benefits
- Risk management – IT systems, business continuity plan, policies and procedures
Understanding Business Risk: During the due diligence process, certain issues can come to light, so it’s important that you not be caught off guard. Potential business risks include environmental, legal, contracts and certifications, or employment. We work with your trusted team to navigate potential issues prior to the due diligence process.
You may or may not have had the time to fully review these items with a team. These projects take time and sometimes fall down the priority list. Having the right external team in your corner to help you drive these discussions is critical. Taking a proactive approach to reviewing these pieces of the business could help increase its value and create a smoother transition and due diligence process.
4. Address Your Family Dynamics
It’s very likely that your business is interwoven into your family dynamic. A thorough business transition plan is essential to securing family harmony and your long-term legacy. By planning ahead and taking the time to have important conversations proactively, you can prevent confusion or conflict down the line.
5. Get the Right Team to Help You
When you start to think about selling your business, you should think about it like a marathon. You want to do everything you can to compete at peak performance. And, you want to surround yourself with the right team of people who can objectively assess your business health and provide strategic guidance to improve your results.
As a multi-family office, we have a full bench of advisors experienced in the dynamic legal, financial, operational and emotional aspects of transitioning a business. We’ve developed a thorough process to evaluate your business and condition you for the best outcome possible—potentially even accelerating the value of your business in the long run.
- Goal setting and financial considerations – Our team can help you clarify your goals and answer the financial questions regarding how much is enough to continue your desired quality of life.
- Managing timing and emotion – One of the biggest areas of surprise for business owners is how emotionally taxing this process can be. There is a lot of stress wrapped up in weighing the perfect time to sell and putting one of your proudest assets in front of third parties to judge. The right team of experienced advisors can help you assess all the strategic and emotional layers of selling your business so you don’t miss a great opportunity.
- Business valuation review – When you clearly understand the value of your business, you have a stronger, more confident position in negotiations. Our advisors help by performing a comprehensive business insights report using our exit planning software. This can level-set the conversation as we move through both personal and business planning.
- Proactive tax strategy review – The sale of a business leaves a lot to consider in terms of tax implications. We work with your CPA and other trusted advisors to deliver proactive tax strategies.
Whether the potential sale of your business seems far off in the distance or right around the corner, a thorough transition plan puts you and your business in a stronger position—whenever opportunity may strike.
Read our case study or download the business transition checklist.
