Preparing to Sell Your Business
Business owners often engage a team of professionals when they are ready to sell to guide them in hopes to receive maximum value for their business after years of hard work, dedication and vision.
The problem is that they often get hit with a reality check: their business isn’t worth as much as they thought it was.
Whether you're aiming for retirement, ready to venture into new opportunities, or seeking to capitalize on your success, preparing for the sale requires meticulous planning and strategic execution. Without proper preparation, you risk leaving significant value on the table and encountering avoidable pitfalls.
In this blog we will guide you through the essential considerations for getting your business ready for sale. By following these best practices, you’ll be equipped to engage your team of professionals and be on track to receive a successful and rewarding sale.
Plan ahead
Planning ahead is the key to receiving maximum value for your business. The biggest mistake we see made by business owners is engaging a team of professionals when they are ready to sell. Instead, engage a team of professionals BEFORE you’re ready to sell.
At a very minimum, you need to start planning 2 years in advance. If you can start planning for your sale 3-5 years in advance, that’s even better. We are currently working with a company that hired us 5 years before they want to sell. We are helping them increase profit and cash flow in their business so they can 5x the value of their company in 5 years.
Preparing for your sale and planning ahead also includes considering your customers and how to best handle the transition, training of key employees, and assessing personal and business readiness. These considerations will impact the offers you receive.
Financial preparation
Financially preparing to sell your business will help you maximize value and attract potential buyers. The first thing you need to do to financially prepare is to make sure you have a clean set of books. Accurate and well-organized financials increase buyer confidence and can lead to a higher sale price. The cleaner your books are, the faster you will be able to sell your business. Buyers will want to dive deep into your:
Income statement - revenue, profit margins, expenses and EBITDA
Balance sheet - assets, liabilities and equity
Cash flow statement
Financial ratios & metrics
Historical performance
Marketing & sales engine
If any of these items need to be improved prior to selling to maximize your sale price, consider hiring a fractional CFO that will be able to come in and give you actionable advice on how to improve metrics so you are able to increase profit and cash flow. Learn more about our CFO services here.
You’ll also want to be able to produce redacted financials that show your add-backs. Add-backs are adjustments made to a company’s financial statements to reflect the true earnings of the business. These adjustments typically include non-recurring expenses, owner’s compensation, personal expenses run through the business, and other discretionary costs that are not essential to the company’s core operations.
Tax planning
You want to engage your team of professionals before you’re ready to sell so they can help you pay the least amount of taxes legally possible on the sale. There are many tax planning strategies you will want to consider.
Structure of the sale - asset sale vs. stock sale
Asset sales can result in higher taxes for the seller due to the ordinary income tax on depreciation recapture, while stock sales are often more favorable for sellers, as they are typically taxed at lower capital gains rates.
Timing of the sale
You want to plan the timing of the sale to take advantage of favorable capital gains rates. You may even need to consider spreading the sale proceeds over multiple years through installment sales to keep your income in a lower tax bracket.
Maximizing retirement accounts
Stocking away money into retirement accounts can be a great way to defer taxes as you are preparing to sell your business.
Section 1202 exclusion
If your business qualifies for Qualified Small Business Stock, up to 100% of the gain from the sale can be excluded from federal taxes.
Tax-free reorganizations - 1031 exchange
If you are selling real estate as part of your business, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds into a similar property.
Estate planning
Consider different gifting strategies before the sale of your business to take advantage of gift tax exemptions and potentially reduce your taxable estate.
Residency planning
You will want to evaluate the impact of state and local taxes. Moving to a state with lower or no income tax before the sale can result in significant tax savings.
Legal
Legal preparation is a critical step in ensuring a smooth and successful sale of your business. You’ll want to review and organize all legal documents, including corporate records, contracts, employee agreements, and documents for intellectual property.
Engaging experienced legal counsel to guide you through the due diligence process and draft necessary agreements can help safeguard your interests and facilitate a smoother transaction when you sell your business. Proper legal preparation enhances buyer confidence and maximizes the value and efficiency of the sale process.
It’s never too early to start networking with professionals who might be good to engage several years before you’re wanting to sell your business. These are the best professionals to have in your corner as you are preparing to sell:
Accountants
Wealth advisors
Lawyers
Bankers
Brokers
Investors
Other business owners who have been through a sale
If you’re thinking about selling within the next five years, start engaging these professionals now. Build your team so that you can have the most successful and rewarding sale possible.