By Michael G. Skowfoe
Selling a business isn’t just about the sale price—it’s about how much you walk away with in your wallet. Selling a business is usually one of the most significant transactions—if not the most important—in a business owner’s career. You have created value in your company and are now about to realize your life’s work!
The stakes are high. After all, what is the point of selling if you can’t maximize your efforts? Meanwhile, you generally have one chance to get it right.
If you’re going to sell your business, you’re probably looking to make sure you derive the greatest financial benefit possible. Let’s take a closer look at this important step in the process of selling a company and points to consider.
Determine How Much You Need from Your Business Sale
To seriously consider selling your business, it is important to first determine how much you need to receive from this sale to make sense and be meaningful. In working through this decision analysis, some important things to think about are:
- How much do you receive in income distributions from the business, and is that enough to support your lifestyle today and in the future?
- In a prospective sale, do you have an income number that you’re targeting? If so, how did you arrive at this number?
- Is this a gross or net number taking taxes into consideration? What are you estimating for taxes, and can this burden be reduced?
- What, if any, personal expenses do you run through the business and would need to replace (i.e., fringe benefits)?
- Car, insurance, travel, entertainment, etc.
- Is there any debt against the business that needs to be considered?
- If so, is this an item to be addressed in the sales price or in advance of any sale?
- What tax implications might arise from the sale, in addition to capital gain/income taxes? Have you explored any pre-sale tax planning?
- Loss of health insurance deductibility
- Loss of Qualified Business Income Tax deduction
- What retirement planning strategies might be lost?
- Have you been maximizing contributions into qualified retirement plans?
- Can you make both personal and business retirement plan contributions?
- Do you intend to start another business, or do the proceeds from this sale need to support you for a lifetime?
- Would you consider staying on in the business on a consulting basis, or do you want out completely? Would you be open to a portion of the sales proceeds being structured as an earn-out? What happens if you do not meet earn-out expectations? Can you still live your ideal financial life?
- What is a reasonable/acceptable expected rate of return from the sales proceeds to support your lifetime spending needs? Are you comfortable with the risks associated with trying to achieve this rate of return?
- This transition from generating income primarily from your business to doing so from the investment of sales proceeds is critical and must be thought through carefully.
- If the proceeds from the sale of your business are more than you need to support your lifestyle, are there other financial goals you would like to achieve?
All the above items are reducible to cash flow analysis—or how much in principal dollars from the sale of your business invested at a reasonable rate of return will satisfactorily support your lifetime spending needs.
The two biggest expenses you will likely have during retirement are taxes and inflation. It becomes critical that you manage your proceeds in such a way as to minimize these risks. This need highlights the importance of working with a professional wealth advisor to help work through this analysis.
Gather a Team of Professionals to Support Your Company Sale
You’ve spent a lifetime building your business—don’t leave the outcome to chance. Our recommendation would be to build a team of experienced professionals to help you through the process and maximize your outcome.
Depending on your business, your team may look like the following:
- Corporate attorney
- M&A advisor or business broker (depending on size)
- Estate attorney
- Valuation expert (who may or may not be your accountant)
- Wealth advisor/financial planner
The Role of Wealth Management Before, During, and After Your Sale
You should consider the role that wealth management can play in your exit. Wealth planning in areas such as taxes and wealth transfer can potentially enable you to create a situation in which you walk away from a sale with more money for you and your family. This is where going through a discovery process with a financial professional can be extremely helpful.
Proper pre-sale exit planning will focus on several key areas:
- Determine what is important to you by focusing on your goals and objectives.
- Work out ownership structure to minimize taxes.
- Protect assets against creditors and predators. Many business owners do a poor job of making sure their personal wealth is protected.
- Help ensure you walk away from the sale of your business with the most after-tax money possible.
- Optimize the management of the proceeds post-sale.
Before a sale, a wealth advisor may be able to assess the legal and financial strategies you’ve implemented or are considering—to determine whether your planning has been effective and is likely to enable you to achieve your goals.
Many times, this assessment reveals opportunities to improve strategies before a sale becomes imminent, which may improve outcomes.
Look at Investment Management
Another area to explore before a sale is Investment management. Investment decisions about the money from a sale are often overlooked because entrepreneurs are focused on getting the transaction done.
Going from being the CEO of your business to the CEO of your investment portfolio can be overwhelming. If not handled knowledgeably, you may encounter problems, such as:
- Outliving the wealth due to ineffective investment management
- Paying too much in taxes because of a failure to integrate investment management with broader wealth planning strategies
There are different philosophies, approaches, and methodologies to managing money, and you will need to consider many factors to find the appropriate approach—what you seek to accomplish with your wealth, your comfort with various types of risks, etc.
It’s essential you have confidence that the way your money is being managed will achieve the results you are looking for.
Going through the wealth planning process early on, particularly with a wealth advisor who has expertise in your needs as a business owner, can help you gain clarity on what you need to walk away from the business and live your financial life with confidence.
We offer an introductory call for business owners ready to transition their business. Get in touch with us for a complimentary consultation.