Many of our clients with closely held businesses have plans to one day transfer ownership to their children, and our last two articles have focused on how to keep the peace when financial stability isn’t the primary goal for the first generation. But not everyone has children to inherit the family business, and others have kids who simply aren’t interested in taking over.
When that’s the case, the goal of a sale is typically to maximize the value of the business and ensure you have everything you need for a comfortable retirement.
So how do you do that? There are several steps to ensuring your business sale is as smooth and profitable as possible.
“When do I start?”
If you’re thinking about retirement, you should probably start planning now. Lots of times, business owners reach a point where they’re ready to be done with the business, and they want to sell by the end of the year, which doesn’t leave much room for planning, and can mean leaving money on the table.
Ideally, you want at least five years to prepare for the sale of your business—this ensures you have ample time to find a business broker, prepare your business for sale, implement proactive tax strategies, find a buyer, talk to your CPA, talk with your attorney, negotiate a deal, etc. That said, I’ve helped plenty of clients navigate the process in less than three.
Either way, if your ideal retirement is less than five years away, the first thing you need to do is get a valuation of your business.
Step 1: Determining the Value of Your Company
You can find a standalone appraiser to do this for you, but many times, business brokers will offer valuations as part of their service. They’ll give you an idea of what your business is worth, and if the number is much lower than you expected, they can coach you on how to better prepare your business for the market.
This is one of the primary reasons it’s important to start the process early—making a business sale-ready is a much more extensive process than staging a home. You might discover you have too much overhead, or you have the best sales in the world but not enough staff, or you’re relying too much on one client. All these things take time to address, but they’re worth it if you want to get the best price for your business.
On the other hand, your valuation may come in much higher than expected, and you could sell sooner if you wanted.
Step 2: Finding a Buyer
Once you’ve determined what your business is worth, the next step is finding the right buyer.
One option is to sell to a private equity firm—this typically comes with a higher offer, but a take-it-or-leave-it deal structure. So while you might get more money, the terms may not be as favorable. For example, they may offer you $10 million, but only $2 million in cash and the rest in shares of their company that are vested over time. Or they may stipulate that you stay on as an employee for several years after the sale (which, for most in this scenario, is less than ideal). And while you can negotiate, typically the larger the company (or the higher the offer), the more inflexible the deal.
Another option is to sell to a key employee within your company, which is fairly common with closely held businesses. This option allows more flexibility in terms of the deal, and it offers some peace of mind, knowing the person has been in the business for years and is familiar with the operations.
You can also sell to a competitor, or an individual looking for an investment opportunity. The best buyer will largely depend on the value of your company and who can afford it. There are plenty of employees who could buy a one-to-two-million-dollar business, but not as many who can afford a $25, $30, or $40 million company.
Step 3: Making a Deal
Once you’ve identified your buyer, it’s time to establish the terms of the deal. You might do an all-cash sale, which has its advantages, but if an employee is purchasing the business, this isn’t always feasible for the buyer. Even with a loan, the bank will typically require some sort of down payment, which might be several hundred thousand dollars, depending on the sale price.
Another option is a seller-finance deal. This is where the buyer pays the seller with interest over time. The benefit to this is that you can walk away with more money—by the time all the payments have been made, you might get $1.4 million for a $1 million sale. On the other hand, you remain financially responsible until all the payments have been made, which can be risky. If your buyer no longer can make payments, you get the business back by default—in whatever state it’s in.
Because of this, seller-finance deals are most common for closely-held business owners selling to key employees—they know the buyer, they trust them, and they have faith they can run the company well.
Step 4: Minimizing Taxes & Fees
Of course, one of the best ways to maximize profits on the sale of your business is to minimize expenses—namely, taxes. One way to do that is by gifting shares of the business to your heirs pre-sale.
Let’s say I’m selling my business, and my cost basis is zero, and the company sells for $1 million. When I sell, I’ll be in the top tax bracket and have to pay all the taxes required of that bracket. But if I have kids who are going to get the money from the sale (or a portion of it) anyway, I can gift them shares of the business at today’s price; then, at the time of the sale, the gains will be realized in their name—gains that might equal $200,000 each—which, of course, won’t put them in the top tax bracket, so there are fewer taxes paid overall.
The timing of the sale can also impact your tax burden—if you’re selling a brick-and-mortar business and you own the real estate, you can sell the business one year and the real estate the next (typically on December 31st and January 1st), so the profits aren’t realized in the same tax year. (Ifyou’re selling real estate, just make sure to account for recapture depreciation.)
If you’re charitably inclined, there are lots of ways to minimize your tax burden through charitable giving.
As far as the terms of the deal, you typically want to sell as much as possible in capital gains rather than ordinary income, which is more favorable from a tax perspective. Navigating how the sale will be taxed is definitely a step you want to take with your CPA or financial advisor, as the details can get complicated.
Another way to minimize expenses is to forgo working with a business broker. You might have a trusted employee willing and ready to buy, so you don’t need help finding a buyer. If you do this, you just need to weigh the pros and cons—a broker could potentially find you a higher-paying buyer, but some of that additional profit could be eaten up in fees.
Step 5: Preparing the Kids
If you do plan to gift anything to your children prior to the sale or directly after, encourage them to work with your financial advisor and create a financial plan. I’ve witnessed clients’ children inherit large sums of money that they spend almost as quickly as they receive because they don’t know how to manage that level of wealth. Having an advisor guide them through the process ensures they can steward your gift wisely.
There are lots of ways to maximize the sale of your business, and working with an expert ensures you have all the information you need to make the best decisions. If you’re considering selling your business and you want help preparing for the process, we’d love to meet with you. We’ve helped countless business owners navigate the complexities of succession planning and sales to ensure they and their families are prepared for their best possible futures.