Among the toughest decisions for any business owner is whether and when to sell one’s company. The owner, having built the business and seen it thrive, must carefully consider many possibilities prior to, during and after the sale. Like a metaphorical triathlon, working through this process can be a complicated, complex, and even harrowing experience.
Business owners and executives considering the sale of a company have important decisions to make at three different phases: Before Negotiations (the swim), Purchase and Sale (the bike race), and Closing and After (the run). Although considering a sale during a pandemic may seem counterintuitive, merger and acquisition activity has remained steady in many business sectors and there could be good opportunities to act upon soon.
Before Negotiations (the Swim):
Prior to negotiating the sale of a business, an owner must honestly evaluate their company’s salability and the timing of the sale. Is the business on trend in its industry and is there a likely buyer, or better yet, buyers? How motivated would potential buyers be to purchase the business? Are there direct comparables for the business’s valuation process?
In a perfect world, the ideal compensation scenario for sellers is the “bird in hand” scenario, being paid up front and in cash. It’s important to remember that if a seller agrees to be paid out over time, they risk losing value over time if the company is poorly managed after the sale. While being paid in installments spreads out the tax liability, it’s best to be fully compensated for the value of the business at the time of the sale. Similarly, it’s best to avoid payment in stock or a combination of stock and cash, since any misguided operations after the business sale may decrease the stock value and effectively reduce the purchase price. There are pros and cons to each scenario and it would be prudent to assess each in the scope of one’s long-term financial plan, including current and future taxes.
Purchase and Sale (the Bike Race):
What issues should a business owner be prepared to discuss during negotiations for the sale? First and foremost, the owner must have a thorough understanding of his business’s value (i.e., cash flow, growth, margins, assets, liabilities, and intellectual property). The owner should have a firm grasp on the business’s exposure to past (and possibly future) liabilities. In addition, when the seller owns the business property, they should know in advance if it makes good fiscal sense to retain the real estate and lease it back to the purchaser and if that might be an appealing prospect to them.
When walking into the negotiations for the sale of their business, the owner should also know if they are willing to sign a non-compete agreement — and the limits for its duration. Finally, the owner should have determined ahead of time if they will insist that the purchaser sign a non-binding letter of intent.
After Closing (the Run):
Once the business sale has closed, it’s important for the seller to think holistically about their financial future, both professionally and personally. First, the seller needs to determine whether or not they need a new source of income, be it a new job or an investment. And how should they reinvest the proceeds from the sale? Because of the tax savings associated with them, Qualified Opportunity Zones may be a worthwhile investment.
Other more personal planning considerations are health, life and disability insurance — adjustments will likely need to be made. Also, it would be wise to have an estate attorney review and update estate documents upon the sale of the business.
Since business owners often spend years reinvesting company proceeds back into their business, they may need to play catch up on retirement savings. To best take advantage of this windfall, it is important to work with a trusted financial advisor to appropriately invest in a customized and diversified portfolio that aligns with the seller’s long-term goals and objectives. Down the road, cash flow strategy (tax optimization) and possible Roth conversions should be considered each year.
For the business owner, it can be hard to view their company objectively and navigate emotions surrounding the sale of the company they have worked for years to build. Business owners don’t have to do it alone. They would be wise to rely on experienced and trusted advisors, such as a business coach, financial advisor, accountant, and investment banker, among others. By enlisting an expert team, a business owner can be confident that they’ll receive objective, fact-based financial planning and investment recommendations throughout the different phases of the negotiation and sale.
Davis Barry is a financial planning analyst at Agili, assisting clients with the development and implementation of comprehensive financial plans. He is currently pursuing the CERTIFIED FINANCIAL PLANNER™ designation. He can be reached at firstname.lastname@example.org.
Marilee Falco, CFP, ChFC, is a principal and financial strategist at Agili, responsible for client financial strategy and counsel, comprehensive financial planning and investment management as well as managing the firm’s Bethlehem office. She can be reached at email@example.com.