Importance of Planning Before Selling a Business

If football movies have taught us anything, it’s that planning and preparation leads to a higher level of success. The old adage, if you fail to plan then you are planning to fail, is applicable in many aspects of life. This includes both personal and business endeavors. When it comes to high stakes activities like selling a business, the importance of proper preparation and planning cannot be overstated. There are many steps a business owner needs to take prior to placing the company on the market to ensure an optimal return. This includes company level items such as reviewing employment and business contracts, financial records and entity structure. There are also personal considerations, such as investment plans, to determine. To help you understand the preparation steps, below is a summary of key issues to consider.

Business Considerations

While a business owner may feel their company is operating just fine and no changes need to be made, it’s important to remember to view operations through the eyes of a potential buyer. Key areas to assess include:

• Employment Contracts – A main consideration of a potential buyer is ensuring that the existing staff, or a great portion of it, will remain after the sale of the business. Rarely does a buyer want to purchase a business that doesn’t have the staff that has helped make it successful. Talk to your staff to ensure key employees will stay with the company once it’s placed for sale, during the transition and after the deal is closed.
• Financial Reports – There’s a difference between the financial reports managers need to assess company performance and those needed by a potential buyer to conduct due diligence. For this reason, it’s essential to have financial reports reviewed by an expert to ensure they are properly formatted. Work with your accountant to place all financial information in the proper format and make them ready for review upon request.
• Entity Structure – This is an area of planning that is often missed by many business owners. While the legal entity structure may have been optimal for the years you managed the company, there are different considerations that need to be made when you are thinking about selling the business. Given the diversity of legal business structures, it’s important to conduct a thorough review to determine which will offer the best tax situation for the owners once a deal has been reached. This is an essential step in the planning process to ensure the selling owner pays as little tax as possible. 

Personal Considerations

Perhaps more important than business considerations are the personal financial considerations of the owner post transaction. Key issues to contemplate include:

• Investment Planning – How will the proceeds from the sale be invested? Is the goal to use the proceeds to replace income previously generated from the company or to fuel retirement planning? Creating an investment plan with clear financial goals will create a well-defined path for accommodating the owner’s financial needs after the deal is complete.
• Deal Structure – What type of deal structure is acceptable based on financial goals? In our experience, this is a critical question because deals can be structured in various ways, including all cash, company stock or a promissory note from the buyer. The answer will be influenced by the financial situation of the seller and their investment plan.
• Tax Liability – Consider whether all the tax liability from the transaction needs to be paid all at once or whether a deferral would be beneficial. The answer to this question will have an impact on the deal structure the business owner should accept.

Plan Before Selling Your Company

There are several complex issues that must be addressed and carefully considered before putting a business up for sale. If proper care and advanced thought is not given to these issues, it’s more than likely the outcome will not be optimal – and possibly even disappointing. If you are considering selling your business, please contact Sikich to get started.