Do you know how much your business is worth? How much of your net worth is dependent on its value? The point of these questions should encourage you to consider how you can use a valuation to effectively plan your exit timing, find and identify potential buyers, and structure a tax-effective transaction so that you, as the owner, will have an idea of what you will bring with you into retirement.
Whether you are ready sell your business or not, it’s important to think about the overall timing of your exit. A potential sale transaction can take as little as a few months to dragging out for more than a year, especially given the current M&A environment due to the COVID-19 pandemic.
One question you should ask yourself before considering a potential buyer’s offer relates to the outcome for the employees once the transaction takes place. Will most of the employees be let go or is the potential acquirer interested in keeping the culture and legacy of your business intact, and does that matter to you as the seller?
Depending on your answers, you may or may not be selective about the potential list of buyers.
Compile a list of potential buyers
The best way to approach the potential sale of your business is to compile a list of likely buyers, considering the following:
- Are there family members or current management employees interested in or capable of taking over the business?
- Are there any competitors that might pay a premium to eliminate your company from the market?
- Would selling the company to the employees through the creation of an employee stock ownership plan (ESOP) be a good fit for your business?
- What consequences might employees face if you sold to a private equity or an investor group?
A key part of transitioning successfully from your business is making sure you are at peace with how everyone will be treated once the transaction is over.
You may also want to consider the possibility of remaining with the business for a set period of time following the transaction to help transition the business to the new owners. This can depend on the transaction structure and if the buyers are treating an employment contract with you as part of the overall consideration for your business.
Consider the tax implications
Of course, as a CPA, I would be remiss to give advice on selling your business without discussing the potential taxes owed, which impacts your net take-away from the transaction.
There are many different types of transaction structures, but the most common are an asset sale or a stock sale. An asset sale is usually most tax advantageous for the buyer, while a stock sale is usually most tax advantageous for the seller. Both types of transactions can command different prices for the exact same business simply due to certain tax benefits received by the buyer or seller.
Look for a future article for an explanation in the differences between an asset sale and a stock sale, including how the sale structure can generate tax benefits or liabilities. Use this time to sketch out a list of potential buyers and think about the outcome you would like for your management team and employees. Selling your business is an emotional process for everyone involved.
Original content written for the American City Business Journals (2016). View source webpage here.