What to know when selling a business
When selling a business, there are many kinds of potential buyers and many ways to structure a sale. But it all starts with your goals.
By Jill Garvey, CPA, CFP®
Senior Wealth Strategist
For many, selling a business to an outsider offers the potential for a clean break when it comes time for life’s next chapter. Others may plan after a sale to continue leading their companies but need the infusion of capital to fund expansion or a move into new markets. Whatever the situation, a successful sale can open doors to whatever comes next.
Too often, however, failure to consider how to sell a business keeps those doors shut. According to industry statistics provided by business brokers and industry publications, only 1 in 15 prospective small business buyers ever complete a transaction†.
In a Market Pulse Survey of owners selling their businesses, more than 40% of owners of businesses worth between $5 to $50 million had done no planning, and more than 35% had listed their companies for sale after less than a year of preparation‡.
This type of short-term preparation can lead to lower-than-expected selling prices and derailed succession plans.
A clear strategy can help lead to a successful sale and a seamless transition. A well-structured transaction meets all or most of an owner’s goals. You may also have goals for the business’ future in the community, as well as your personal and family goals that lie outside the main business objective.
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Finding potential buyers
Once you’ve decided to sell, you’ll find there are several types of potential buyers:
- A strategic buyer who wants to get into your business or to establish a local presence and who sees synergies with your company.
- A financial buyer, attracted by your business’ profitability.
- The private equity market which may provide an investment that lets you exit completely or just take some cash out of the business.
- Selling to your employees through an employee stock ownership plan (ESOP)
You might consider an initial public offering if the company is large enough.
Often, your personal motivations for a sale can directly influence how it’s structured, and what kind of buyer or partner you consider.
One owner I worked with sought diversification, not wanting all of his assets concentrated in the business. But he also wanted to continue to lead the company for several years and help it expand. His goals dictated how he would proceed. He partnered with a private equity firm that provided four injections of capital, turbocharging the company’s growth while increasing the wealth on the owner’s personal balance sheet and paving the way for his eventual departure.
Another owner’s primary concern was her employees. She felt they had put their blood, sweat, and tears into the company, and she wanted to make sure they were taken care of. She sold shares of the business to the workers through an ESOP, while also making sure there would be a strong management team in place during the transition. This approach, which triggered capital gains taxes when shares were transferred, was costly from a financial perspective, but met her emotional need to support the employees and the community.
In other cases, maximizing a company’s value is paramount. The owners may be more emotionally detached, having built the business specifically to sell it to fund post-business lifestyles. The choices you make depend on your ultimate goals.
Preparing for a sale
When an owner considers how to improve a business’ curb appeal, several aspects may need attention. We want to get that business in the best possible shape to attract a buyer. That means making sure financial statements are in order and easy for a potential buyer to understand.
This stage also requires some strategic soul-searching about how best to position the business, and to anticipate what potential buyers will want to know. That may involve issues of corporate governance and structure.
But also ask yourself where the company’s real value is. Is it in the management team? The sales force? The product? And how crucial is the owner to the company’s operation?
"A well-structured transaction meets all or most of an owner's goals—the business objective, of course. But you may also have goals for the business' future in the community, as well as your personal and family goals."
Wealth Strategist, Huntington Private Bank®
Factoring in the family
This is also the time to address family members’ interests. There should be written agreements with those who work in the business, and advance planning to transfer assets to those who don’t.
You may want to gift shares to an irrevocable trust with family members as beneficiaries. This needs to be pinned down well in advance of signing a letter of intent.
Assembling a team
The most important step in setting a sale in motion is to gather the appropriate team of advisors, who for most owners are individuals they’ve worked with for years and who are privy to the financial side of the business and the personal aspects:
- Certified public accountant
- Corporate attorney
- An investment banker if there will be mergers, acquisitions, or divestitures
- A tax attorney and a trust and estate attorney may be needed if shares of the company will be distributed to family members before a transaction.
You’ll also need a valuation consultant who can provide a very detailed analysis, comparing the business to local, regional, and national competitors. Keep in mind that the objective may not always be to get the highest possible sticker price.
If there’s a sufficiently long lead time, a lower initial valuation can maximize how much of the business can be passed along to family members without gift taxes.
A wealth advisor can often serve as the key person on this team and can make the intricacies of a very complex process flow more smoothly.
We take a macro viewpoint and help owners consider how the business sale connects with their personal goals. Acting as the point team, we can help make sure that financial, estate and tax planning strategies are coordinated with CPAs and attorneys and executed in a timely fashion.
You’ve worked long and hard to get where you are, and just thinking of selling your business may trigger many emotions. We can help relieve some of the stress and work with you to help design a transaction that meets your needs. To learn more, please contact your Huntington Private Bank® team to see how we can help, or find a Huntington Private Bank office near you.
† Parker, Richard. Jan. 2, 2020. “Why 90% Of Potential Business Buyers Fail.” Forbes. Accessed Dec. 9, 2022.
‡ International Business Brokers Association. ND. “Fourth Quarter 2020 Survey.” Accessed Dec. 9, 2022. https://assets.ibba.org/wp-content/uploads/2021/02/Market-Pulse-Q4-2020-ER.pdf
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