6 best practices for selling or transferring your business
Selling or transferring a business can be a life-changing event. The event is the culmination of years of hard work and often results in the monetization of your largest, albeit most illiquid, asset.
That said, the process requires forethought and planning. The best outcomes are realized through years of advanced planning. Assemble a team of advisors who will lead you through each step along this journey so you can ensure the most favorable outcome. BMO Wealth Management shares six best practices to guide you in the pursuit of a sale or transfer of a business.
"I want to monetize my company's value" → Find a strategic buyer and achieve the highest value possible.
"I want to continue to grow the business" → Transition to a trusted partner or someone who shares your vision.
"I want to keep it in the family" → Pass the family enterprise to the next generation.
Each path takes time to execute, so start years before any planned transfer. Assemble a team of trusted advisors, include corporate and estate lawyers, accountants, exit planning advisors, and bankers. Consider time to train and mentor your successors. By starting early, you’ll have enough time to make tax-efficient gifts or sales to your family to community.
Knowing the realistic value of your business helps ensure you avoid surprises when considering offers.
Valuation is typically conducted by a mergers and acquisitions firm or an investment bank. A valuation conducted by a qualified appraiser with knowledge of your industry will establish a fair price for the business and will also identify areas of improvement, which if completed may increase your firm’s value. Knowing the fair market value is essential if your plans involve making gifts to family in order to have a valuation of shares or interests transferred for estate planning purposes.
This may be a financial transaction, but there are emotional aspects to any sale or purchase.
Your business has likely been one of your highest priorities for many years. Prepare emotionally to accept the change before you begin your negotiations. Are you looking forward to travel? Spending more time with family? Starting a new venture? Joining a charitable organization? We recommend you set aside some time to develop a well-crafted plan for your next chapter.
A good plan will direct you to the right type of buyer, be it an outside buyer, management, strategic partner, or family member.
You may want to stay involved in the business during a longer transition period. In that case, you’ll want a buyer who welcomes your involvement. Perhaps you feel that the future owners should stay in the community that you cherish. The negotiations are your opportunity to structure the deal with the most favorable terms for you.
Know that insisting on specific conditions may mean agreeing to a lower sale price. Some owners are willing to give up some value if it means executing a sale on their own.
A business is an illiquid asset, and a sale is often necessary to monetize the value. However, emergencies may arise that can pre-empt even the best-laid plans, such as the death of an owner.
If a business needs to sell fast, perhaps to settle an estate, that’s a less than optimal situation to obtain the best price. For starters, the right people may not be in place to take over, and the market cycle may not be as receptive as other times.
Advanced planning is vital so you can sell on your terms and realize the valuation you seek.
A sale of a business will most likely require capital gains on the appreciation of the sale or stock or interest units (if you are selling securities). In addition, there may be ordinary income and income recapture if the buyer only purchases the business’s assets. However, with early planning you may minimize some of the tax consequences of the transfer.
You may structure the sale, so you receive income payments over time, rather than one lump sum. Installment payments may lower your overall tax obligation by keeping you in a lower tax bracket. An installment sale involves some risk. In theory, by doing this, you will be financing the buyer’s purchase. If the buyer is unable to pay or the business fails, you may not realize all your payments. You may need to step back in and run the business for a time, and then begin the transition all over again.
Consult with your tax and estate planning professionals for the most tax-efficient strategies for your particular situation.