Laying the Groundwork for a Business Sale
Whether you're looking to move into retirement or the time just happens to be right to sell, take steps to maximize the value of your life's work.
With the recent stock market volatility and U.S. credit rating downgrade, many Americans are increasingly watchful over their retirement savings and other investment vehicles. But for small and mid-size business owners, retirement savings and nest eggs are often tied directly to their closely held businesses. So while their immediate business needs are obviously affected by economic downturns that influence interest rates, credit availability and inflation, their ability to reach retirement and other financial goals may actually be more aligned to the effectiveness of their plan to ultimately sell or pass on ownership of their business.
This isn’t just a concern of those approaching retirement; according to the U.S. Small Business Administration, 40 percent of U.S. businesses face transfer of ownership issues at any given time. That should prompt any business owner to think about building an effective succession plan. Just as entrepreneurs who are starting out require a business plan, those wanting to sell their business likewise need a plan to help transfer ownership, and maximize the returns from the sale of the business.
One key to a smooth change of ownership or to protect against an untimely death is to plan early. If you have family members who will be succeeding you in the business, early preparation helps them grow into their new roles and responsibilities over time and with greater confidence. If you will be selling to a third party, you can take the time necessary to ensure you have properly valuated your company, and find a new owner who has the means and talent to purchase and grow the business. Purchase of life insurance in the event of an unexpected death can provide a cash cushion to search for and hire a new business manager, create liquidity to pay estate taxes or provide a funding source
for the company to redeem family owned stock.
Planning = Flexibility
Moreover, planning early provides you with the opportunity to make changes to your plan, if necessary, before you actually transfer control. Some key components you’ll want to incorporate into your plan are: A good, objective business valuation, succession planning strategies, tax and estate-planning strategies, and key man or business-owned life insurance.
After you’ve built a business from the ground up, being objective about its value is often difficult. A good starting point is to research other companies like yours that have sold recently. This will give you a rough idea of what price your business might bring. For a more accurate idea, contact a business broker or have a professional business valuation conducted.
Think about the type of buyer who would be ideal for your business: Perhaps an employee? A competitor? An investor who wants to make a profit but isn’t interested in day-to-day operations? Siblings, children, or other family members? The sale price you can realistically expect to receive will depend in part on the type of buyer.
You’ll also want to think about your future participation in the business after it has sold. Consider the role you’d be willing and able to play, if any, during the transition to new ownership.
If you decide to keep your business in the family or transition ownership to an internal partner, a succession plan is critical. You’ll want to build a plan that clearly defines your successor’s roles and responsibilities, and sets expectations for how the business will be transitioned.
A succession plan is often an effective tool for minimizing your estate taxes. Financing solutions, gifting strategies, and tax-advantaged business structures can help protect your business and
your family’s financial interests.
Selling your company for a fair price is important, but so is securing all available tax advantages and minimizing your potential liability. Will you be structuring the sale as an asset sale or will you be selling your company stock? Each has different tax and liability implications.
You’ll also want to make sure all your assets are titled correctly prior to the sale of your company. Further, you may decide to create an ownership structure for your business that reduces tax consequences, or even move the ownership interest into a trust.
With smart planning, you’ll be in a better position not only to command top dollar for your company, but also to minimize taxes on the sale. It is important to consult your legal and tax advisors well in advance of any planned business sale to create a coordinated business ownership transition strategy. 
Kelli Glynn is senior vice president and regional manager for M&I Wealth Management, a part of BMO Financial Group.
P | 913.235.2000
E | Kelli.Glynn@micorp.com
Return to Ingram's August 2011