Top 5 Considerations Before Selling Your Business

To sell or not to sell…that is the question.

Depending on where you are in your career, thinking beyond being a business owner may be really far off. But, it’s even FURTHER off if you don’t start considering what goes into selling your business.

For the benefit of you, your family, and your key employees.

Even though business owners tend to be future-based, the thought of how you will sell your business is typically an afterthought. The problem with that is it takes away your control when it comes to several factors that go into selling your business. Here we will help you understand:

• Establishing your business’ value
• Your lifestyle requirements
• Potential tax implications
• Retaining your key employees, and
• Identifying what could go wrong

These aspects will help you decide if it’s the right time to sell your business.

What To Know Before Selling Your Business

#1 The Value Of Your Business

Most business owners either don’t know the true value of their business or haven’t assessed its value recently. Which is why this is the VERY first stop when considering selling your business.

Not knowing your business’ value is like starting in the dark. Don’t start in the dark.

Regardless if you’re selling to a family member or a third party, being equipped with the value of your business before selling it is essential for a successful and well-informed transaction. It helps set the stage for realistic expectations, enables you to confidently engage in negotiations and attract serious buyers. 

A proper valuation ensures that you avoid underselling your life’s work or overpricing it, streamlining the process and saving valuable time. 

Everything that follows is based on the true value of your business.

#2 Your Post-Sale Income Requirements

Imagine a life after being a business owner – that’s hard to imagine, isn’t it? A huge aspect of your post-sale will be determining your income requirements. How will you continue to derive income after the sale of your business?

This income needs to account for your burn rate. How much does it cost to be you each month? We all have our number so let’s begin with the end in mind. Here we need to accurately address areas that may include your:

• Mortgage
• Hobbies
• Goals
• Debts, and
• Any other monthly expenses

The income required to cover your lifestyle after the sale is directly related to the sales strategy of your business.

Starting with the end in mind means if you say it costs $20,000/month to be you – what is the least amount of capital required to generate this income? And where does this number match up to what your business is worth today?

Rather than following this process, business owners will get fixated on the whole sale price, expecting to pull 3-4% off the proceeds of the sale to support their lifestyle. This is often not the best approach.

With accurate post-sale income requirements determined this puts business owners in one of two situations:

• The sale is able to happen sooner
• You are able to sell for less than you thought you had to

#3 Potential Tax Implications Of The Transaction

It’s no surprise that tax efficiency is a huge driver for business owners considering selling their business. Depending on how you choose to sell, what are the tax implications of that transaction?

With the right experienced professional in your corner, there are many options for business owners to utilize strategies for tax efficiencies.

MINIMIZE TAX AT THE SALE

According to UBS, 44% of business owners plan to pass their business down to their family. For those of you who are planning to sell their business to a family member, gifting, rather than selling, is a great option here. 

Gifting the business means you are able to effectively implement tax strategies on the tax owed at the time of the sale.

But, don’t worry, that doesn’t mean you can’t meet your post-sale income requirements.

Your cash flow can come from deferred compensation. Meaning the business pays you X over a period of time. It’s the same amount of money for the sale but with almost zero taxes on the sale.

ELIMINATE TAX AT THE SALE

An employee stock ownership program (ESOP), when properly structured, the buyer and seller have the ability to defer and even eliminate capital gains tax payment on the sale, according to 1042 of the Internal Revenue Code. Because of these substantial tax benefits, this is a strong consideration for most business owners.

When thinking about creating tax efficiencies in your business, an ESOP provides tax benefits along the way as well as after the sale for the participants. This option provides a lot of wins as the dominoes begin to fall.

With an ESOP you will receive a check for the full value from the sale up front. Though some restrictions will apply on how you can use the funds – they are yours to use and leverage.

ADDITIONAL WAYS TO MINIMIZE TAX AT THE SALE

While an ESOP is a strong and appealing option for most business owners, it doesn’t mean it’s the right fit for you. Rest assured, in most cases, you will not find yourself having to write a check within six months of the sale of your business.

• Installment of payments – lower the check and lower the taxes each year
• Charitable remainder trust – aligning your exit planning with charitable goals to defer the taxes
• Financing the tax – borrow money against the check to pay the tax, then decide how and when to pay off the line of the credit

Saving money on taxes is a huge driver for business owners.

#4 Retaining The Key People That Drive Your Business Value

Once you’ve established the value of your business today, and you know what you want to value to be tomorrow when you sell, you have to understand who drives that value.

Value is driven by your key employees.

They are the value that’s driving the acquisition. And they are important to your goals. So, how are you retaining your key employees?

Aligning your key employee’s goals with your goals is essential in retaining the value of your business. Even if you don’t have an employee retention plan in place today, it’s not too late to ensure you retain them. This starts with an honest conversation about your plans to sell and yours plans to keep them engaged until you do so. For your benefit and their own.

#5 Identifying What Could Go Wrong During The Sale Process

There are many cases where business owners were going to sell but they failed to protect against the what-if’s. Identifying all the things that could go wrong is part of the process that can’t be overlooked.

• Is there a buy-sell agreement in place?
• What if you were to get sick or injured?
• What if a partner or key employee passes away?

With proper planning for the sale of your business, these areas of concern won’t stop you from moving forward in the fourth quarter. You will be equipped with solutions to continue the sales process.

Just like in our personal life, addressing the what-if’s is something none of us want to do. But, we do it anyway and hope it never comes to fruition.

These considerations for selling should be addressed approximately 5-7 years before retirement…unless you’re kicking the can down the road. But, with proper planning, that 5-7 year timeframe actually shrinks for business owners. Getting you closer to that post-business owner lifestyle.

Is Now The Right Time To Sell Your Business?

To sell…or not to sell. Owning your business, as tough as it can be, is at least familiar to you. Selling your business is not. This is why it’s so important that you flush out these details in a proactive rather than reactive manner.

Being proactive in your business puts you in the driver’s seat, helping to determine how and if you will get to the point where selling your business makes the most sense for you and your long-term cash flow.

However, all things said, there are simply instances where your business is worth MORE in its cash value than its sale value. But the good news is – you can still take more of a passive ownership by elevating your key employees, allowing you to continue owning it without running it.

If you’re thinking about selling your business in the coming years, it’s time to check these considerations off your list, helping you understand what the future could look like.

2023-163210 Exp. 10/2025

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.  

This material contains the current opinions of Neal Brincefield and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.