Selling Your Business | A Comprehensive Guide
Making the decision to sell a business is a hefty one requiring evaluating priorities and requirements for the transaction to be deemed a success. As you contemplate selling your company, you will want to be sure you get the most you can get out of it, whatever your goals may be.
Success in selling a business can take many forms. For some, success can be a way to create liquidity to enjoy the financial rewards of their hard work. In other cases, transferring ownership to family members or trusted colleagues could ensure business continuity. Some owners even use the sale of their business as a springboard to start again with another endeavor.
Selling a business is undoubtedly one of the most significant financial decisions in one's life. If you're navigating this process for the first time, it's natural to have many questions. You might be wondering about the real value of your business, how to attain the maximum possible sale price or the most appropriate deal structure. This article aims to guide you through these crucial matters. It offers insight into the journey you're about to embark on, helping you explore various options and strategize how to enhance the legacy you'll leave for your loved ones.
Getting Your Business Ready to Sell
Preparation is vital to a successful sale. Before you put your company on the market, you will want to make you have a detailed understanding of issues.
Start by defining your primary goal. For some, this is simply creating liquidity; for others, the focus is on passing the family business on to the next generation. Your goals and priorities will shape much of this process, so clarify them before you begin.
Next, consider who will be handling the workload. Selling a business is a task-intensive process, so assemble a roster of the individuals within your organization who will participate and clearly define their roles. Also, determine who your key advisors will be, such as lawyers, accountants, tax experts, and business brokers, as these individuals will be integral to the process.
You will also need a realistic idea of how much your business is worth. You can get a rough idea of your selling price by researching earnings multiples on other companies in your industry. However, for an accurate reading, you may need to consult an expert such as a chartered business valuator, a corporate finance specialist, or an accountant with experience in business appraisals.
If you are planning an external sale, potential buyers may include strategic buyers, usually larger companies in a complementary business, or financial buyers, including private equity funds. If your intention is to pass the business to family members or business partners, you will need to identify suitable candidates for crucial roles within your organization, such as the CEO.
Lastly, before initiating the process, examine crucial legal and business documents, including your company’s operating agreement, voting agreements, shareholders' rights agreements, buy-sell agreements, and any other documents that may influence the sale. Verify that all documents are up-to-date, legitimate, and duly signed.
Managing Tax Implications
Once your initial planning is complete, your focus will shift to taxes — this is particularly important if you plan to transfer your business or the proceeds from a sale to family members.
The sooner you begin planning your asset transfer, the more flexibility you will have to reduce estate taxes. By giving or selling business interests to your heirs before you sell your company, you transfer all future appreciation in these assets to them tax-free. We share 7 Strategies for Minimizing Taxes when selling your business on our blog.
Also, it's important to know that privately held assets can often be valued significantly lower than their public market value. According to a legal expert, there are two types of discounts applicable: 'lack of marketability', which can range from 25 to 35 percent, and 'lack of control' discounts which can vary between five and 15 percent.
To avoid any complications with the IRS, make sure to finalize any private sales or gifts before signing a letter of intent with a potential buyer. It's worth noting that the IRS typically considers the execution of a letter of intent as setting a price.
In a scenario where you have accepted an offer but have not yet transferred ownership to your heirs, there might still be some options available. For instance, there are certain discounts that you may be eligible for before finalizing the deal based on uncertainties related to the transaction. These could be discounts for the time value of money held in escrow, the likelihood of achieving earnout targets, or the risk arbitrage related to whether the deal will proceed.
For many entrepreneurs, the sale of their business unlocks opportunities to significantly impact their communities, address issues they deeply care about, or make a broader global contribution. Designating a part of the sale proceeds to charitable causes not only helps reduce potential estate tax liabilities but also imbues their lives with greater purpose and fulfillment.
The simplest method to incorporate charity in your estate plan is through outright donations. Affluent families may consider setting up a family foundation or endowment to oversee their charitable contributions. Alternatively, some may choose to use donor-advised funds to achieve their philanthropic objectives. Numerous business owners discover that charitable contributions foster family unity, as family members convene to discuss the causes they wish to support and the organizations they want to sponsor.
Charitable remainder trusts (CRTs) are financial tools that allow donors to transfer assets to a charity while still receiving income from those assets. They have a dual advantage: donors can claim a tax deduction for the charitable contribution in the year the trust is established and also remove any future growth of those assets from their taxable estate. At the same time, they will continue to receive regular income from the trust for many years or even for their entire lifetime.
On the other hand, charitable lead trusts (CLTs) function in the reverse way. They provide regular income to the designated charity for a predetermined number of years. However, the donor and their heirs maintain ownership of the assets placed in the trust. So, while the charity benefits from the income generated by these assets for a specific period, the assets themselves will eventually revert to the donor's family or heirs.
Turning Your Business Into a Lasting Legacy
Selling a business is a significant and emotional milestone, encompassing not only substantial financial implications but also marking the end of an important chapter in your life. The process can seem overwhelming, with myriad responsibilities to juggle and little room to contemplate the financial security of your family in the future.
Despite the complexities facing business owners during the time leading up to the sale, the decisions made during that interval can establish a lasting legacy for your descendants. Through meticulous planning and diligent preparation, you can safeguard the financial fruits of the sale for you and your successors while also minimizing the potential tax implications. The earlier you embark on this preparation, the more options and flexibility you will retain in the journey.
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