The moment has finally come for you to put your
company up for sale. Planning the sale of a business can be a task especially
if you're unsure where to begin or how to go about it. To ensure a profitable
process it's advisable to start preparing as early, as possible. Time can truly be
an advantage when it comes to selling a business. Let me provide you with some
guidance, on how to sell your company whether you're looking to retire or
venture into a business endeavor.
How to Sell Your Business: Key Pre-Sale Steps
Selling a business requires planning. As you embark
on this journey it is important to consider both the steps and the long-term
objectives. Otherwise, you may find yourself making choices that undermine your
ultimate goals. Let's take a look, at the process and what to consider after the
sale has been completed.
Get organized and familiar with your numbers.
The initial task involves arranging the aspects of
your company. Begin by tidying up QuickBooks estimating the figures and
generating indicators that pertain to your industry. Gain an understanding of
the numbers. Assess the state of the company identify any outstanding
liabilities and examine both gross sales and net income growth rates. Additionally, consider the number and size of your client base. Lastly, ensure that your
future forecasts align with these factors.
It's best to begin as soon as possible so that you have
enough time to make any necessary improvements. You can use the capital to
refinance reduce your debt or buy out minority owners. Even if there are no
changes needed, having disorganized or incomplete records can jeopardize the
deal from the start. It's also worth considering and giving some thought to
this matter.
Conducting an examination of your records to provide
potential buyers with a sense of assurance.
Assemble your advisory board
Having a group of consultants supporting you
during the sale of a company is extremely important. Let me explain why; likely
you have never sold a company before and it's unlikely that you will do it again.
We often don't realize what we don't know... Remember, you only have one shot
to get it right.
Make sure to prepare your team of advisors both for your business and personal matters in advance of the sale. Your business advising team should include professionals, like a business broker or investment banker a valuation specialist, an accountant, a tax advisor and someone experienced in transactions or M&A Additionally involve advisors such as estate planning attorneys and CPA/tax advisors, in the process.
The sale process involves complexities to consider; determining the transaction structure devising strategies to retain employees handling tax preparation matters planning for post-close cash flow management among others. Therefore it is crucial to collaborate with professionals who can guide you through these intricacies and help you understand the options.
What is the value of your company?
Collaborating with an appraiser a business
intermediary or an experienced investment advisor can assist you in accurately
assessing the actual market value of your company. When contemplating the
approach, to selling your firm it is important to take into account the current
expectations and willingness of buyers to pay.
It might also be an idea to explore
potential values based on different methods of selling. For instance, if the
company were to be sold through an employee stock ownership plan (ESOP) the
valuation would probably be lower compared to a sale, to an equity firm.
Additionally selling a portion of the company without retaining control may not be as appealing as selling the business.
As you and your advisory team evaluate the approach, for selling your company it's important to consider how the structure of the transaction can impact its valuation.
Define your objectives and budgetary requirements.
Before you delve deeply into exploring the
possibilities of selling your company it's important to evaluate your
objectives for the transaction. Ask yourself what your ultimate goal is. Do you
want to sell your stake in the firm and walk away, with the money?. Perhaps you
have the desire to pass on the company to family members or employees? Another
consideration is whether you're willing to continue working for another 3 to 5
years after selling all or a portion of your company. Additionally think about
how crucial it is, for the brand's survival and what your monetary requirements
When it comes to selling a company there are methods and lawyers can come up with creative solutions. However, it's essential not to waste time on options that don't align with your goals or financial needs. So before getting enticed by transaction structures and tempting tax minimization schemes take stock of your objectives and needs.
Talk to your advisor, about how you plan to keep track of the sale of your company. What are your financial needs and goals? Are you considering making any purchases?
This can assist you in determining the amount of
money required from selling your company and whether it would be wise to
consider the advantages and disadvantages of alternatives, like a sale.
You're in the process of selling your company, but the deal hasn't yet been finalized.
A transaction usually requires a duration of
3 to 12 months to be completed. It's important to stay focused, during this time
and avoid spending the expected earnings or mentally retiring before reaching
the finish line.
While actively engaged in a transaction the business must continue operating as planned. Even if there is a team of advisors selling a business takes time. However, it's essential to meet sales projections achieve profitability goals, and maintain financial metrics throughout this period.
Before finalizing the deal here are some additional factors worth considering:
- Please ensure that potential buyers sign a disclosure agreement before proceeding.
- It's crucial to work with your business advisors to avoid disclosing much information too early, in the process.
- Keep in mind that a letter of intent (LOI) is an agreement that doesn't legally bind either party and simply outlines the proposed terms of the transaction.
- Remember there's still a way to go before the purchase is finalized! Time can be your enemy as any changes within or outside the company such as personnel departures or regulatory concerns could jeopardize the contract.
- Make sure to have discussions, with your M&A counsel and CPA about the tax implications associated with transaction structures and potential tax liabilities.
- Examples include considering whether it's better to acquire assets or stocks and evaluating any state tax consequences.
Sold! What to do with the proceeds from the sale of your company
- Once the transaction is finalized there will be choices to make regarding how to utilize the funds obtained from selling your company. It's crucial to consider aspects such, as estate planning, charitable giving, setting up trusts, and safeguarding your assets. Whether your goal is retirement venturing into a business endeavor or finding a middle ground, devising a strategic plan to optimize the value of your earnings is essential.
When you run a business it's important to consider that a large portion of your wealth is tied up in one asset. Selling that asset can help you spread out your investments and create an income, for your retirement. If your business is making profits it would be beneficial to explore this option.
You need to figure out whether the income, from the sale will be enough to maintain your way of life.
It's crucial to have an understanding of the risks and options involved when deciding how to handle the money you receive from selling your business. To make sure you're not retiring prematurely it's advisable to incorporate a Monte Carlo simulation into your strategy. This approach is highly effective, in stress testing a retirement plan taking market volatility into account.
As a business owner, your main focus has always been, on running and growing your company. However, it's important to consider planning for your financial future when it comes time to sell your business.
Three Tips for Selling Your Business and Getting the Most Value
Start with the eventual goal in mind.
In Stephen Covey's book "The 7 Habits of
People " he emphasizes the importance of having a clear vision, for the
future as the second habit. Whether it's passing on our business to family
members, employees, or even an external party it's crucial to have a long-term
goal in mind. Another option worth considering is selling shares to a partner.
To make decisions it's advisable to consult with professionals such as
accountants, attorneys, and financial advisors who can provide insights on tax
implications, succession planning, and other financial matters.
If you're considering a third-party sale it's essential to focus on asset preservation and tax savings. It's best to start preparing in advance of the transaction since certain methods may become limited once an offer is made or because other strategies are more favorable under tax rules (more information about this can be found in the trusts section below).
To ensure wealth management begin by assessing your situation and envisioning where you could potentially go after completing the deal. Take into account factors such, as goals and aspirations.
- What steps should you currently consider if you plan on selling in the future?
- What are the different types of buyers and what aspects should be taken into account when selling to each of them?
- What tax or financial tactics should you evaluate prior, to engaging in a transaction?
These are some of the questions we ask to get a client's comprehensive wealth strategy started.
In addition, we offer retirement cash flow projections to help our customers visualize the outcomes of choices such, as selling in installments or selling outright.
The predictions help customers figure out the selling
price. We also work together with the accountant to come up with strategies to
reduce sales taxes and minimize estate and gift taxes. I suggest reviewing tax
returns, estate documents, buy-sell agreements, and partnership agreements and
consulting with the attorney who drafted them. When it comes to the sale of a
company everyone needs to be involved. It's crucial, for the accountant, tax
attorney, and financial consultant to cooperate.
Implement a zealous tax-loss harvesting plan.
Selling a company can lead to a long-term
capital gain, which is subject, to capital gains tax. Usually this results in
tax rates compared to income taxes. However, it's important to remember that it
is still a form of taxation. Let's say you started a company with $100,000 and
sold it for $10 million today; your long-term capital gain would be $9.9
million (calculated by subtracting the selling price from your investment). To
calculate the federal capital gains tax you would apply a 20% rate, which would
bring down the profits from the sale to over $8 million.
To help business owners in this situation I recommend implementing a tax loss harvesting (TLH) strategy with their funds as soon as possible. The goal is not to incur losses but to acknowledge that they are unavoidable.
When investing in the stock market these concepts often come into play. Fortunately, the IRS allows investors to deduct their losses from their profits. Investors are permitted to deduct up to $3,000 in losses, from their income taxes and any additional losses can be carried forward for years.
To expand the number of tax lots, for our clients who own the company we establish a brokerage account. Acquire individual stocks at different points in time.
We employ a strategy of tax loss harvesting every month. This involves selling a stock that dips below a threshold and purchasing an investment to maintain our client's investment portfolio while also recording the loss from the sale. It's important to adhere to the wash sale regulation to avoid any complications. Our customers can carry forward these losses, on their tax returns allowing them to offset any gains from selling their business (state regulations may vary).
It's a method. I don't think many business owners fully leverage their potential or utilize it to its fullest extent.
Invest 8% of the account's value in losses during the year and allocate 3% to 7% of the account value for subsequent years (please note that these figures are, for illustrative purposes only; individual results may vary). The chart below shows that this particular client has $300,000 in recorded losses, which can be used to offset a capital gain from selling their business after five years. It's important to keep in mind that not all tax loss harvesting strategies are equal in terms of cost and complexity. Therefore I highly recommend seeking advice, from a professional who can help you develop a portfolio tailored to your needs.
Begin trust planning early.
Trusts are incredibly important when it comes to
estate planning and the sale of a company. They serve as a way to protect
assets handle estate or income taxes and give instructions for distributing an
estate or business.
It's important to start planning as soon as
possible. The current income and estate tax regulations are set to expire by
the end of 2025. If that happens the current estate tax exclusion, which allows
each U.S. Citizen to be exempt, from federal estate taxes upon their death
might decrease from $12.92 million to $6.2 million (adjusted for inflation).
One strategy worth considering is a lifetime access trust (SLAT) that takes advantage of the existing high estate exemption level. With a SLAT a married individual can remove assets from their estate, such as a held company while still indirectly benefiting from trust income through their spouse. Assets transferred to a SLAT are not subject to estate tax. By setting up a SLAT the donor can make use of the exclusion amount available.
However, it's important to note that SLATs may not be suitable for everyone. One drawback is that if the non-donor spouse passes away the donor spouse will lose access to the trust assets. Another option, for business owners is a grantor-retained annuity trust (GRAT) which transfers ownership shares in a company out of an owner's inheritance if they survive the designated trust period.
These are some considerations when it comes to trusts and planning for your assets.
Putting everything together
Selling a business can be quite challenging. When it comes to planning the best approach is often to start implementing effective strategies well ahead of time. One way to reduce capital gains tax is, by initiating a tax loss harvesting plan as early as you can.
Preparing your estate and trust is incredibly
important, especially considering that the current tax regulations are set to
expire in 2025. It's worth noting that certain trusts may offer advantages if
you obtain a business appraisal before selling.