Business Succession Planning Part Two: Preparing the Business for Sale
Business succession planning is more of an art than a science. As many Americans are reaching retirement age, more and more businesses are reaching the transition phase. For some family business owners, children are waiting in the wings to take over the business. For others, transitioning the business to family is simply not an option.
Part two of this series will focus on a few considerations for business owners that either do not have children, or their children are unwilling or incapable of taking over the family business.
1. Clean Up the Books and Records.
If transitioning your business to children is not an option, you need to focus your energy on making your business more attractive for a potential sale. Ensure that your organizational records are up to date and accurately reflect the current state of the company. For example, your records should properly identify the appointment of officers and managers of the company, and for corporations, stock ledgers should be updated as shareholders come in and out of the business.
From a financial perspective, reducing business debts and cleaning up your accounting books will make a potential sale more appealing to third parties, and will also reduce the amount of time it takes to close a sale. The time and expense of employing an accountant to assist in this process is often less burdensome than pursuing a sale with inadequate records—treat the account’s role as an investment to an eventual sale.
2. Identify Potential Buyers.
Who is a potential buyer of your business? For some, this may be a key employee or group of employees. For others, it might be a competitor or a private equity group. If you are unsure who your target buyer is, you may want to consider hiring a broker that specializes in connecting buyers and sellers.
The type of buyer you target will impact the sale transaction. For example, a sale to a group of employees under an ESOP (employee stock ownership plan) may move slowly and will require careful compliance with federal regulations. Conversely, a sale to a private equity group can be completed quickly but may be structured in a highly complex manner with tense negotiations.
3. Consider Your Post-Sale Role.
Can your business survive without you? If the answer is yes, then immediately stepping away from the business may be a viable option. In that case, enjoy retirement (or your next venture), but expect to sign a noncompete that will prevent you from kickstarting a new business in a competing area for several years.
Conversely, if the business cannot survive without you, you need to consider what role you will play in the business after the sale, and what decision-making authority you want to retain. Additionally, how long do you want to stay actively involved in the business? Many owners sign up for 3-5 additional years following the sale, only to become tangled in a toxic relationship with the purchaser. Limit your time with the company to the amount of time it will take to smoothly transition the business, but no longer.
4. Be Smart With Post-Sale Proceeds.
Selling your business will probably be one of the most rewarding events of your lifetime. It will also likely represent the single biggest influx of money in your lifetime. Be strategic with your sales proceeds—lean on your financial advisors for investment help and ensure that you analyze the potential income and estate tax consequences of the sale. On the estate planning front, you may benefit from setting up an irrevocable trust to provide asset protection and estate tax benefits for your spouse and children. Reaching out to your advisors before the sale is complete will give you the best chance at maximizing your planning benefits.
Our attorneys at Baker Heath can assist you with the sale of your business, whether the target buyer is a family member or third party. Let us help you navigate the rocky waters of exiting your business. Contact us today.
