Broker Check

AVOID SELLING YOURSELF SHORT WHEN SELLING YOUR BUSINESS

| February 25, 2015
Share |

A SUCCESSFUL SALE OR TRANSFER TAKES CAREFUL PLANNING BEFORE THE DAY ARRIVES

Whether it’s your ultimate goal, a day you dread or a day you think will never come, chances are there will come a time when you’ll need to sell or transition your small business. Whichever way you see it, moving on from the business you’ve built can be done in a way that makes all the sacrifice and hard work worthwhile.

To help you prepare, let’s look at three basic ways to transfer ownership, and some of the planning that must take place:

FULL SALE AHEAD

In this method, you’ll sell your business to a qualified third party or family member. You can facilitate the process with a buy-sell agreement, normally a contract between partners put in place well before you’ll need it. If you are a sole proprietor, however, a one-way buy-sell agreement is an option. In this instance, a qualified friend, family member or valued employee would agree to buy the business upon the occurrence of a specified event, like your retirement.

Things to think about:

  • If children are not financially able to buy the business at fair market value, you’ll need to work out a financing agreement to complete the sale.
  • The business won’t be part of lifetime gifts or available for inheritance.
  • Without a buy-sell agreement, you’ll need a qualified sales support team.

PARTIAL SALE

This method provides you with financial flexibility not offered in a full sale. Here you will sell a minority or majority stake in your business through private equity, growth equity or mezzanine financing. In doing so, you’ll create immediate liquidity, while retaining majority or minority ownership. This could potentially eliminate personal guarantees and help mitigate the risk of having a majority of your assets tied up in your business.

Things to think about:

  • Timing is key.Where your business is in its lifecycle (growing startup or mature enterprise) may dictate the options available.
  • A shareholder agreement is necessary to cover all eventualities including non-performance strategies and early exit strategies.

BE “E-BUSINESS” AWARE

Ensure the new owner knows the usernames and passwords to any financial or online accounts, including business-specific social media profiles.

GIFT/SUCCESSION

You’ll essentially give the business to someone in your family, either while you’re living or as an inheritance. Transferring your company this way allows you to control the timing and size of the gift. You can dictate terms in your will, gift it directly while you’re still living or even transfer it to a trust. Consider, too, any possible tax advantages, including the ability to combine the business with lifetime gifts and the potential ability to exclude future appreciation from your estate.

Things to think about:

  • Your chosen heir may not want to run or may not be capable of running the business. Make sure well ahead of time and put proper training in place to help make the succession successful.
  • Talk to your advisors about all tax implications.

YOUR BUSINESS, YOUR RETIREMENT

It’s natural for business owners to see their businesses as retirement nest eggs. But due to unfavorable economic climates or other unforeseen circumstances, this is not always the case. That is why, as a small business owner, it’s imperative for you to talk to your financial advisor about how you see your business fitting into your retirement plan well before you need to step down. He or she can help you plan for both best- and worst-case scenarios to help ensure your personal and professional goals stay on track.

SELLING OR TRANSFERRING YOUR BUSINESS REQUIRES GROUNDWORK. YOU’LL NEED TO:

  • Allow for at least two or three years to fully plan for new leadership
  • Perform a financial and tax review
  • Consider the tax consequences of a sale
  • Determine a strategy to optimize cash flow after the sale closes
  • Have the business valued and determine whether to sell interest or shares versus selling the assets
  • Make copies of key documents going back at least three years
Share |