Exiting Your Business? 3 Critical Considerations

August 18, 2020

Selling a business is the culmination of years of hard work and dedication to a way of life.  The seller has one opportunity to get the sale “right” to maximize retirement wealth and preserve that which will be transferred to future generations.  Of course, there are many detailed considerations, but the early focus should be in three critical areas.

1. Value Enhancement

Enhancing the value of the business should be a top priority.  For example, if 80 percent of a company’s sales are to 20% of its customers, potential buyers will factor that risk into the purchase price.  Business owners must hire trained professionals to identify aspects of the business in need of attention. All aspects must be considered: financial, customer relations, manufacturing processes, vendor relations, and taxation to name a few.

The value enhancement strategy should include the sellers performing “buyer’s due diligence” performed by accounting and law firms.  Why wait until an actual buyer performs a detailed review of the business?  Such reviews can expose risks that hurt the enterprise value of the business.  Such exercises will cause issues to be addressed before any buyer uncovers them, which should serve to strengthen the company’s standing and value.

2. Financial Planning

Business owners need to have a comprehensive personal financial plan that analyzes cash flow, taxes, estate planning, and insurance considerations among other things. Such engagement generally leads to other professionals engaged to implement strategies highlighted in the plan.  The plan can reveal the cash the seller needs to receive at closing to create a sound retirement cash flow plan.  It also should highlight any excess cash generated by the sale and such “extra” can be earmarked for more aggressive tax and asset planning estate planning strategies.

The financial planning process can help business owners plan for the most tax-efficient strategies for the sale of a business and transfer of wealth.  For example, the selling business owner can structure a trust to own his or her shares and that arrangement can provide asset protection, federal and state income tax minimization, and still provide the owner with access to the funds for retirement cash flow needs.  In addition, prior to the sale, an owner may be able to establish residency in a state with no income taxes and mitigate the state income tax bite on the sale of the business.  It is tricky to navigate that slippery slope, but worth the effort in some cases!

3. Emotional Considerations

Transitioning from working long hours to no longer making day-to-day management decisions is extremely difficult for most business owners.  A successful retirement requires a change in mindset and adjusting to a new way of life.  Often, coaches can help an owner with the change that is about to occur.

Business owners desiring to sell must engage professionals early to ensure the success of the transaction.  Plans put in place long before a sale will enhance the owner’s personal wealth management plan and the overall value of the business being sold.  Maybe most importantly, the selling owner can receive help in making the mental adjustment needed for a fulfilling retirement.

Michael C. Foltz, JD, CPA, CFP® is a BDF founding principal and founder of our Business Owner Team with an extensive background in law, tax, and estate planning.  Mike shares his estate planning expertise by following the ever-changing federal and state estate tax laws and preparing education summaries for clients and team members.  Recognized by Chicago magazine as a Five Star Wealth Manager, Mike has given numerous presentations on estate planning to BDF clients and professional organizations such as the Exit Planning Institute and Illinois State Bar Association. Publications such as Inc. magazine and the Wall Street Journal have featured his insights into estate planning, and he has contributed to an estate-planning publication for Commerce Clearing House.