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How to Sell Your Business

By Paul J. Carroll, CFP®January 12, 2024March 27th, 2024Articles

How to sell your business represented by image of 2 businessmen shaking hands.Embarking on the sale of your business is not just about cashing in on your hard work—it’s a complex process that reflects the culmination of time, investment, and dedication. This journey to a successful sale begins with understanding the pitfalls and planning meticulously to avoid them.

In this guide that follows, inspired by the book Tips & Traps, you’ll benefit from strategic advice and essential steps to maximize your wealth during the sale. It’s a path that requires a team of professionals to navigate, ensuring you get the true value for your business while being prepared for both planned and unexpected opportunities. And it all starts with the right mindset.

Mindset for Selling

Before you can approach the undertaking of selling your business, you will want to understand your motivation for selling. What are the targets you want to achieve? What is your ideal outcome?

Whether the intent is to sell the business to a competitor, or transition it to key employees or family, it’s crucial to start with the end in mind. Reactive sales, often triggered by unforeseen events like death, divorce, disease, or downturn, are common. Even if you think you’ll never sell, every business has a price, and owners should be prepared for any eventuality.

You can avoid losing out on the value you built by proactively planning and gaining clarity on your “why” way before your exit. Ultimately, a business is a tool to achieve objectives, and the ultimate goal should be to sell at the right time and the right price.

Let’s take a look at how to prepare yourself and your business for a profitable exit.

Build Your Deal Book

Value of planning ahead vs. reacting

Selling a business may not always follow the time table you expect. You may even receive an offer unprompted, when you were not even planning to sell. If you find yourself in a spot where you have to react, you will put the value of the sale in jeopardy. Maximization of wealth does not require you to sell the business; it requires only that you be ready to sell. If you plan ahead and create a deal book, you will be ready when the right opportunity presents itself that you want to consider.

What is a Deal Book?

Building a “Deal Book” is a fundamental step in preparing a business for sale. The Deal Book serves as a comprehensive manual for selling the business. It is akin to conducting due diligence in advance, allowing you, the seller, to be ready with answers to potential questions from buyers. When a buyer shows interest, and the Deal Book is prepared, the business owner can swiftly address key questions such as their motivation for selling, their desired price, and their terms.

The Deal Book not only aids in the sales process but also enhances the value of the business even if a sale doesn’t occur immediately. It’s a tool that ensures the business owner remains in the driver’s seat, maintaining momentum, trust, and value maximization throughout the sale process.

The two parts of a Deal Book

Part 1 – Pre-Sale Planning

Planning to sell your business, represented by image of business man reviewing a documentThe Pre-Sale Planning section is a confidential plan for the entire sales process that outlines your exit plan and will not be seen by the buyer. This section of the deal book is meant for your eyes only or for a select group of trusted individuals within your firm. Pre-sale planning helps business owners wrap their arms around the preparation process, ensuring they present their best face to potential buyers. Here’s how to structure this crucial part of your Deal Book:

  • Objective and Action Timeline: First, clearly define your objectives for the sale. Whether maximizing profit, maintaining business integrity, or considering the impact on clients and employees, your end goals will steer all subsequent decisions. Identify your preferred buyer type, as this will influence your approach—strategic buyers may align with your vision, while private equity firms could have different intentions. Aligning your business sale objectives with a timeline of action can help you stay focused and prepared for both planned and unexpected offers.
  • Risk Assessment and Expert Team Composition: A risk matrix should be prepared to evaluate and score potential risks to your business valuation. This proactive approach allows you to mitigate risks most likely to harm your deal. In conjunction with risk management, assemble a team of experts, including wealth managers, CPAs, attorneys, and M&A specialists. This team will guide you through the complexities of the sale, ensuring you are well-prepared and reactive throughout the process.
  • Information Release and Confidentiality Management: Develop a detailed plan for the release of information, carefully considering the impact of each disclosure on your negotiation power and business stability. Use NDAs and other confidentiality agreements to protect sensitive information, and establish strict protocols for communication to prevent leaks. In the event of a leak, have a contingency plan for damage control, ensuring minimal impact on your employees, customers, and stakeholders.
  • Offering Memorandum and Retention Plans: The offering memorandum serves as your sales brochure, crafted to generate interest without compromising confidentiality. Retaining key players and clients is also vital; consider implementing stay bonuses and having frank discussions at the appropriate time. Prepare a plan for the handling of hard assets, intellectual property, and any real estate involved, ensuring these are properly valued and leveraged in the sale.
  • Family Considerations and Valuation Drivers: Address any family involvement in the business early on, making tough decisions regarding their future roles and benefits. Identify the main drivers of your business’s valuation, ensuring they are clearly presented and leveraged in your Deal Book.

This pre-sale planning is your roadmap to a successful sale, laying the groundwork for a well-executed transition and the maximization of your return from the deal.

Part 2 – Pre-Packaged Due Diligence

The pre-packaged due diligence section of your Deal Book acts as a testament to your business’s transparency and organization. It provides potential buyers with a meticulously curated collection of documents and data, reassuring them of the integrity and potential of your enterprise.

  • Business Line Details and Corporate Governance
    1. Product and Service Insights: Start by detailing your business lines, offering a window into the operational core with data-driven insights into your product and service offerings.
    2. Corporate Legitimacy: Incorporate essential corporate documents, from bylaws to articles of incorporation, to affirm the legal standing and decision-making framework of yourpie chart showing where sellers stumble during the sale of a business. business.
  • Real Estate and Financials
    1. Property Documentation: For businesses with physical assets, comprehensive documentation of land and buildings is crucial, clarifying ownership or lease terms.
    2. Financial Integrity: Present financial statements that have been scrutinized by an outside firm, adhering to GAAP or audit review standards, to showcase your business’s financial health.
  • Special Considerations and Risk Management
    1. Diversity Status: Clearly state any minority- and women-owned business certifications, which can influence buyer perception and valuation.
    2. Proactive Risk Matrix: A well-constructed risk matrix can preempt potential buyer concerns, covering areas from human resources to marketing and customer dependencies.
  • Cultural and Operational Aspects
    1. Organizational Culture: A cultural assessment can provide a qualitative measure of your business environment and operational ethos.
    2. Operational Processes: Detailed descriptions of business processes and employee policies reflect the operational efficiency and health of your organization.
  • Comprehensive Financial Analysis
    1. Detailed Financial Breakdown: A thorough listing of hard assets, financial statements, and ratio analysis paints a complete picture of your business’s financial stature.

Remember, the pre-packaged due diligence is a strategic tool to expedite the sales process. It should be disclosed only after securing the buyer’s commitment through a letter of intent (LOI) and Non-Disclosure Agreement (NDA). Enlisting experts, such as Certified Business Transition Experts, can ensure your Deal Book stands up to the most discerning buyer, paving the way for a successful sale.

Business sale due diligence, represented by illustration of business people studying charts and graphs

Prepare Your Business for Sale

Selling your business is not just about finding the right buyer; it’s about positioning your business to achieve its maximum value. Essential to this process is demonstrating operational efficiency and financial clarity. By streamlining operations and refining financial records, you not only boost efficiency but also present a scalable and adaptable business model to potential buyers.

Operational Autonomy

Operational autonomy has a positive impact on your business’ value. Establishing a business that thrives independently of its owner or key personnel is a significant attractor for buyers. This means systematizing operations, possibly using insights from resources like Traction by Gino Wickman and Scaling Up by Verne Harnish. Implementing effective business processes and structures, along with developing Key Performance Indicators (KPIs), will ensure your business operates as a self-managed entity.

Normalizing Financials

Financial transparency is equally vital. Clearing your financial records of personal expenses and ensuring they accurately reflect your business’s operations is crucial for a fair valuation. This step, known as normalizing financials, will positively influence your business’s valuation. Additionally, understanding the valuation of your assets, both tangible and intangible, and conducting regular financial ratio analysis (including liquidity, solvency, and operational ratios) are essential practices. These efforts not only provide a transparent financial overview but also offer insights for enhancing business value.

Business Valuation Methods

Determining the value of a business is more than a mere exercise in numbers; it’s an intricate process that demands a clear-eyed assessment of tangible and intangible assets. It’s not just about what your business has earned or owns, but also its standing in the market, the consistency of its cash flow, and its future earning potential.

Business Valuation Methods, represented by image of 2 business people looking a computer screen.A common hurdle many business owners face is separating personal sentiment from the objective value of their company. It’s crucial to approach valuation with an unvarnished view, acknowledging that what’s invaluable to you personally may not translate to market value.

You may be tempted to lean on industry hearsay or rough estimates to gauge a business’s worth, but such methods can lead to overvaluation, leaving you ill-prepared for the realities of the market. Instead, business valuation should be rooted in a systematic approach, using established methodologies that range from asset-based to earnings valuation, each providing a different lens through which to view your business’s potential worth.

Enlisting the help of a professional to guide you can help mitigate inflated expectations. You can also learn the best valuation method for your specific industry and along with what elements drive the most value for your type of business.

Finding a Buyer

A successful sale also rests on finding the right buyer for your business, a crucial step that requires careful planning and discernment to avoid potential pitfalls. It’s not uncommon for sellers to prematurely jump at the first offer due to exhaustion from the sales process, but this can result in underselling and mismatched expectations.

To avoid wasting time on the wrong prospects, like tire kickers or window shoppers, pre-qualifying buyers is essential. Strategic buyers typically offer the best value, but it’s vital to distinguish between legitimate interest and those on a “fishing trip” for free insights or IP.

When approaching the sale, listening and understanding the buyer’s intent and needs can help tailor the business presentation, potentially locking in the deal by aligning with their expectations. Evaluating buyer competence is also crucial, especially if owner financing is involved, to protect the seller’s interests post-sale. Networking and maintaining relationships with potential buyers even before the sale is imminent ensures a pool of interested parties when the time comes.

Diversifying interest by courting multiple buyers can prevent dependency on a single offer, which could compromise the sale’s value. Understanding the buyer’s valuation approach can be leveraged to boost the business’s perceived worth. Ultimately, while there is no perfect buyer, thorough preparation and a clear strategy can lead to a successful sale that benefits both parties.

Legal and Financial Considerations

Once you do have an interested buyer with whom you are serious about continuing negotiations, you will have a number of legal and financial considerations. It is crucial for a seller to secure professional advice to navigate the complexities of the sale.

Financial, tax, and legal advisors can help structure the deal to protect the seller’s interests, minimize tax liabilities, and ensure compliance with all regulatory requirements. The goal is to create a balanced agreement that delivers value and security to both the seller and the buyer, providing a clear path forward for the business under its new ownership. It all starts with the Letter of Intent.

Letter of Intent

The Letter of Intent (LOI) is a critical document in the sale of a business as it outlines the preliminary agreement between the buyer and the seller and signals a serious commitment. It’s essential for the seller to carefully negotiate and define the LOI terms since it will serve as the foundation for future negotiations.

The LOI sets the stage for all subsequent discussions and terms of the sale. Key aspects of the LOI include provisions for the involvement of another deal, working capital calculations, governing law, dispute resolution venues, indemnification clauses, and handling of tax liabilities. It’s crucial to clearly define these terms to avoid misunderstandings and to ensure both parties are on the same page.

Additional elements of the LOI include non-compete agreements, confidentiality terms through a Non-Disclosure Agreement (NDA), and considerations for breakup fees to cover the risks of a failed deal.

Letter of intent, represented by businesswomen reading document.Other documents you need to sell your business

Because you have prepared in advance for this exit, you will have the pre-packaged due diligence to share with your buyer. This packet will include a number of the essential documents and data to satisfy the buyer.

Other essential documents in the sale process may include NDAs, non-compete agreements, indemnification agreements, and detailed working capital and tax liability agreements, each contributing to a clear and secure transaction between the buyer and the seller.

Structuring the deal

When structuring the deal for the sale of a business, there are several key considerations to ensure the agreement meets the strategic and financial needs of both the seller and the buyer.

Type of Sale

The first step is to decide on the type of sale: an asset sale or a stock sale. In an asset sale, individual assets and liabilities of the company are sold, and this structure is typically preferred by buyers due to the ability to handpick assets and avoid inherited liabilities. For sellers, however, this can lead to tax disadvantages as gains from the sale of assets can be subject to higher tax rates.

Stock sales, on the other hand, involve selling the shares of the company, thus transferring ownership of the entity in its entirety. This type of sale is generally more favorable for the seller from a tax perspective, as it may qualify for capital gains treatment. However, buyers may be wary of stock sales due to the potential for hidden liabilities.

Tax Implications of the Deal

Additionally, the allocation of the purchase price to various assets can have significant tax implications for both parties. It’s vital to understand how tangible assets, intangible assets like goodwill, and assumed liabilities are valued and reported to tax authorities.

Earn-out Provisions

One of the biggest traps you can encounter when selling your business is embedded in the earn-out provisions. An earn-out is a provision written into the purchase and sale agreement where the seller of a business will receive additional payments based on the future performance of the business sold. This is almost always part of a deal.

This earn out mechanism is designed to bridge valuation gaps, providing an incentive for sellers to remain involved post-sale to ensure the business meets specific financial targets. While earn-outs can increase the overall sale price, they carry risks for sellers, as buyers may make decisions that adversely affect the ability to meet earn-out criteria, such as significant capital expenditures.

Earn-outs should be structured with attainable goals and clear, explicit terms to mitigate these risks. Sellers are advised to approach earn-outs with caution, ensuring that even without this deferred compensation, the initial sale terms will meet your needs.

Funding the Deal

A key outcome of structuring the deal is the determination of how the buyer is going to pay for the business. Funding the deal can be accomplished in a variety of ways:

Funding the sale of the business, represented by business person at his desk, looking at his cell phoneOwner Financing

Owner financing is a high-risk strategy for funding the sale of a business, where the seller provides the loan for the buyer to purchase the business. This method carries the inherent risk of the buyer defaulting, leaving the seller unpaid and the business possibly impaired. While owner financing is common, it is not usually the preferred method. After all, if you don’t want to own the business, don’t finance it.

Sellers opting for owner financing should take a security interest and set up anti-dilution provisions to protect against the business being stripped of its assets by the buyer.

Stock Swap

A stock swap (also known as rollover equity) is often part of deals involving both debt and equity and includes exchanging a portion of the sale price for stock in the acquiring company. From the seller’s perspective, rollover equity can become a trap.  You can find yourself stuck, unable to leave the company you sold.  Or, in the case of receiving stock in a private company, you may be unable to sell the equity in the purchasing company without severe restrictions or financial penalty, destroying your exit plan.

Bank Financing

Bank financing is usually readily available if you have hard assets that are unencumbered (not serving a collateral for a loan or other financial obligation). Without this type of physical or tangible assets, bank financing is more difficult to secure. However,  Small Business Administration (SBA) loans are fairly easy to get for service industries.

Key-person Insurance

Sometimes the resources for the purchase come from a key person life insurance policy. When an internal key player or equity owner dies, the buy-sell agreement with the key-person insurance funds the purchase of the company from the estate.

Employee Stock Ownership Plan (ESOP) Financing

Selling your business via an Employee Stock Ownership Plan (ESOP) means transferring ownership to your employees through a trust. Done well, this preserves the legacy of the company and provides retirement benefits for employees.  But, this idealistic outcome is rare.  One of the reasons such financing doesn’t go well is the agency problem. Individual employees will benefit from pay raises more than they will from the appreciated value of their sliver of ownership. Typically, through their agency, as owners, they tend to grant themselves higher income and benefits than the company can afford. It’s a perennial problem with ESOP financing.

Deferred Sales Trust

In limited circumstances, you can insert a Deferred Sales Trust between yourself and the buyer as a means to defer capital gains on the sale of appreciated assets and real estate. Section 453 of the code permits the sale to the trust in return for a contractual promise to pay you a certain amount over a predetermined future period of time in the form of an installment sale or promissory note. This advanced strategy should not be attempted without the assistance of both a competent attorney and CPA.

Private Equity Financing

Using private equity to finance a business sale typically means that a private equity firm buys out the company. This firm provides capital in exchange for equity, aiming to increase the value of the business with a strategy to eventually sell it for a profit. This route can offer the seller immediate liquidity and can inject the business with growth capital and management expertise. However, it can also lead to a loss of control for the original owners and significant changes to the company’s structure and strategy, as the private equity firm will often seek to implement changes to drive profitability before selling the business.

Tax Considerations When Selling

One of the biggest traps that business owners fall into when they sell their business is underestimating the full tax impact of the business sale transaction.

Tax considerations when selling a business, represented by illustration of desktop with documents, pencils, eye glasses on it.The type of sale—whether it’s an asset sale or a stock sale—can significantly impact the taxation of the transaction. For instance, asset sales are generally less favorable for sellers due to higher tax rates on ordinary income, while stock sales typically benefit from long-term capital gains tax rates, making them more advantageous.

Sellers need to be acutely aware of potential unexpected tax consequences ranging from impact on adjusted gross income from net investment income and capital gains to the risk of phantom income to double taxation from a stock exchange.

The surprise tax factors that can arise underscore the importance of meticulous tax planning and consultation with experienced CPAs and tax attorneys to ensure the most beneficial financial outcome from the sale. A well-thought-out strategy, taking into account all potential tax implications, is essential for maximizing the after-tax proceeds from the sale of your business.

Identify Your Team: Key Players for a Successful Business Exit

As you can see from the tax example above, when preparing to sell your business, assembling the right expert team is as crucial as the business itself. This team will navigate the complexities of the sale, ensuring that your interests are protected and the process runs smoothly.

Your team should consist of experienced advisors, including attorneys, brokers, a CPA, and a wealth manager. The focus should be on value rather than cost; the right professionals will justify their fees by significantly contributing to the success of the sale.

Your team should function cohesively, with each member bringing their expertise to the table. While CPAs ensure financial compliance and optimization, attorneys handle the legal intricacies of the deal. The wealth manager, meanwhile, maintains a broader view, focusing on how the sale fits into your overall financial picture and long-term goals.

Your goal is to build a team that not only understands the intricacies of business sales but also aligns with your objectives and values and will negotiate on your behalf. Remember, the right team can significantly influence the outcome of your business sale, turning a complex process into a rewarding experience.

Preparing for Life After the Sale

Selling your business marks a significant life transition, one that brings both financial and emotional changes. It’s crucial to be prepared for what comes next.

Understanding Financial Realities

Post-sale, many entrepreneurs find the actual amount in their pocket is less than anticipated due to the ‘money illusion’. This highlights the importance of realistic financial planning for the years ahead.

Wealth Protection and Management

Engaging a wealth manager early, well before the sale, is essential. They can assist in setting up structures to protect your wealth from liabilities and ensure sustainable wealth disbursement. Be aware of the Wealth Effect, also known as lottery winners syndrome, that can result in quick, irrational decision making.  Rather, work with your advisor to develop a plan for how to make your money last.

Tax and Cash Flow Management

Prepare for the tax implications of the sale. Establish a separate escrow for taxes and undertake thorough estate planning to protect your heirs’ future assets.

Embrace Life 2.0

The sale often leads to a grieving period that commonly brings feelings of loss and seller’s remorse. Rest assured that this stage is soon followed by a quest for a new purpose. Whether it’s social good, another venture, spending time with family and friends, or personal growth, it’s a chance to redefine your life priorities.  The sale of your business is an end, but it is also a beginning. Embrace this new phase as an opportunity to enjoy the fruits of your hard work and make impactful choices for your future.

Adapting to life after selling your business, represented by image of grandfather playing chess with grandson.Prepare to Sell Your Business with Confidence

As you stand at the crossroads of transitioning out of your business, the journey ahead requires more than just a good plan—it demands a strategic partner who understands not only the financial intricacies of selling a business but also the personal and emotional aspects of such a significant change. This is where our wealth management expertise can help.

We specialize in guiding business owners like you through the complex maze of selling your business, ensuring that every financial decision aligns with your long-term goals and personal values. From evaluating your business’s worth to structuring the sale to minimize tax implications, we are here to provide tailored solutions every step of the way.

But our commitment to you doesn’t end with the sale. Post-sale, we continue to work alongside you to manage your newfound wealth, helping you to preserve and grow your assets for future generations or for the next chapter of your life, whatever that may be.

Are you ready to embark on this journey with a trusted advisor by your side? Contact us today to schedule a conversation. Together, let’s turn the sale of your business into the beginning of your next great adventure.

To learn more, request a complimentary copy of Paul Carroll’s book Tips & Traps: Selling Your Business While Maximizing Your Wealth.

Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.