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Getting Your Business Ready to Sell or Transition

Whether you’re thinking of selling a business soon or in the distant future, you should plan ahead for such a major financial move. You could be ready to take on your next big opportunity, or simply enjoy a well-earned retirement. Whatever the reason for moving on from the business you’ve worked so hard to build, it’s best to follow the old Boy Scout slogan: “Be prepared.”

Bring your team together early

When considering the transition plan for your business, it is important to bring the right advisors to the table to discuss all facets of the process.  Members of your team should include your attorney, CPA, wealth advisor and possibly an M&A consultant or business broker.  This team of advisors will be charged with understanding your different personal, business, tax and estate planning goals and making sure that the transaction is structured to meet those goals.

Who should you sell to?

Identifying a strong succession plan for your business will be an important piece of making sure you receive full value upon sale.  Empowering the future leaders of your business to lead is a key part of your succession plan and should be started ahead of any sales process.  For some business owners, their main goal is to pass the business on to the next generation.  The goals for that type of transaction are much different than selling the business to a third party.  If selling to a third party, you should consider consulting with an M&A consultant or business broker to identify the types of buyers you will target (strategic buyers, private equity or private investors) and what are the items you need to do to make your business most attractive to a likely buyer.  If selling to a family or other related member, you should discuss the different wealth transfer strategies with your wealth advisor, CPA and attorney.

When should you sell?

Be strategic when deciding the right time to sell your business. Deciding to sell now, at your retirement, or at your death can have an impact on the value of the business. The sale proceeds can be used to maintain your lifestyle, or to pay estate taxes and other final expenses. If you’re considering selling to a family member, you may be subject to gift taxes if the sale price is less than fair market value.  But, if the sale occurs before your death, it may result in capital gains tax.  Before engaging in a formal sales process, be sure to meet with your wealth advisor to project the effect of the sale on your overall financial plan.  This may lead you to the many different tax and estate planning ideas that can only be executed prior to the sales documents being executed.

Identify potential selling points and drawbacks

Before you put the company up for sale, it’s helpful to examine all the possible pros and cons of your business from the buyer’s perspective. Advantages of buying your existing business might include:

  • Established product or service
  • Established “goodwill” (this refers to your brand, customer relationships or other intangible value of the business)
  • Strong management team in place
  • Existing collateral
  • Reduced start-up time and cost

You should also look at any possible barriers to buying your business, such as:

  • “Negative goodwill”
  • Poor or technologically antiquated assets
  • Lack of management team succession plan
  • Inefficiencies or other headaches you’re currently facing
  • Difficult-to-change business culture

Once you’ve gone through this exercise, you can begin addressing any barriers, while accentuating any business strengths, to make your business as attractive as possible to future buyers.

Financing options for selling your business

Several financing options are available to you and the buyer of your business. The financing methods you consider and ultimately choose will be affected by many factors, including the identity of the buyer (e.g., family member, corporate entity, unrelated third party), the purchase price, and your own cash needs, tax considerations, and flexibility.

Self-financed loan

In addition to accepting a lump-sum cash payment from your buyer (which may require the buyer to obtain a loan), you might choose to act as creditor and finance the transaction by accepting installment payments over a specified period of time. Although financing the sale yourself may make the business easier to sell, it will likely cause you to remain concerned about its continued success. Remember to put your agreement in writing and include a reasonable interest rate. Otherwise, there could be unexpected income and gift tax consequences.

Tax-free stock swap

If the buyer of your business is a corporation, you may agree to engage in a tax-free stock swap, whereby you receive stock in the acquiring corporation in exchange for your business. In this case, specific tax guidelines must be followed. In addition, securities regulations may require you to hold the stock of the acquiring company for a specified length of time, and may require the filing of a registration statement with respect to the stock of the acquiring corporation before such stock can be resold. You may also be able to contribute your business to a partnership in exchange for partnership interests on a tax-free basis.

Private annuity or self-canceling installment note

Financing your sale with a private annuity or a self-canceling installment note can provide you with an income stream for the rest of your life and certain tax advantages during your lifetime. A private annuity is most often used in sales between family members. A private annuity cannot be secured by a note or collateral without losing its favorable income tax treatment. Unfortunately, income tax on gain is no longer deferred until payments are received using a private annuity between family members; gain is recognized at the time of the sale.

Before choosing a financing option for the sale of your business, talk to your wealth management advisor. The method you choose could have an impact on your estate planning, as well as your current and future tax liability.

Do you want more strategies and tips for transitioning your business and other major life changes? Get our free 20-page guidebook with expert advice on buying or selling a home, preparing for marriage or divorce, starting or selling a business, sending children to college, and approaching retirement.


Where can we help you go next?

Contact a member of the Bartlett team today.