Effective planning can help ensure that when you're ready to sell, you do it in a way that supports your goals and financial future.
When a luxury retailer with multiple outlets throughout the United States initially thought about selling its business two years ago, the owners received a $40 million offer. But instead of selling right away, the owners worked with their wealth advisor and a boutique investment bank to market their business, and eventually received an offer of $70 million.
“Retaining professionals opens a new pool of potential buyers,” says Robert Stern, a wealth strategist with RBC Wealth Management–U.S. “The retailers assumed they would sell to a competitor, but the bank found them a family office that wanted to own the stores as an investment.”
That shows the importance of doing careful advance planning before selling your business, even though an initial multi-million-dollar offer could tempt any business owner.
“Ideally, you should start thinking about transitioning your business with a sale, a partial sale or a restructure at least a few years before you sell it,” says Nuri Benturk, director of corporate and executive services for RBC Wealth Management–U.S. “Before you sell it, you should hire an advisor to help you position the business for maximum value—and to market it.”
It can take one year or longer to prepare a business for sale, says Benturk. Currently, with business valuations high and interest rates still relatively low, conditions are favorable for owners looking to sell, he adds.
“We are in the seventh or eighth inning of a golden era for selling a business,” says Stern.
The first step for business owners preparing for a potential sale is figuring out what their business is worth. Many business owners believe they know the value of their company, but without a professional valuation, they could be underestimating its worth.
As an example, Stern points to an electrical contractor he worked with. The contractor was mulling over a sale, and estimated the company was worth $10 million.
“Our valuation was $15 million, and then a buyer in the same field offered $20 million for the company,” Stern says. “The whole process started with a valuation and resulted in a sale of twice what the owner thought the company was worth.”
Financial advisors can provide clients with a no-cost comprehensive valuation that looks at businesses in the same industry nationwide in the context of recent sales and key performance indicators.
“If those key performance indicators are above average, they can be highlighted when the business is marketed,” Stern says. “If they’re below average, we can work with the owners to improve the metrics before they look to sell the business.”
In addition to making those improvements, some owners may also need time to upgrade their internal systems or bring in accounting services for transparent balance sheets before listing the business for sale.
“Any business owner can benefit from a team of advisors, including wealth advisors, investment bankers, trust specialists, accountants, tax professionals, a business attorney and an estate attorney, who will work together to develop a combined personal and business plan,” Benturk says.
Going through the process of a business valuation prior to selling is also essential for the owner’s personal retirement and wealth planning.
“If someone is working with a financial advisor to develop a wealth plan based on a company they believe is worth $10 million, it’s smart to find out if that’s truly the value,” Benturk adds.
Another important consideration for business owners is what comes after a potential sale. That’s because your plans after selling your business—whether you want to retire, stay involved in the business or start a new business altogether—will impact the structure and timing of your sale.
“Owners should know that it’s rare to get a check and be 100 percent done with a business,” Benturk says. “Buyers usually want a transition period and rarely pay the entire amount for the business in one lump sum. Owners need to make plans based on how much they’ll get upfront, how long they’ll stay involved in the business and how much they’ll get later.”
It’s especially important for entrepreneurs to plan for such a transitional period, as they typically pour their money into growing their business, which means their investments are usually concentrated there. A wealth advisor can develop a new strategy to meet owners’ financial needs, including retirement and philanthropic goals.
How the sale of a business is structured is also something potential sellers need to evaluate. Some owners may want to monetize a piece of their business rather than sell it in its entirety, for example. Owners who strategically plan for this type of transition may be able to sell the business in two or three phases to generate the largest potential profit.
“Regardless of who buys the business, there’s often an ‘earn-out period’ when the owner receives a lump sum at the initial phase of the sale and then additional payments as long as certain benchmarks are met,” says Stern. “That’s another reason to start planning earlier because you may have to stick around longer than you anticipated.”
Business owners who want to walk away immediately from their business may need to accept a lower offer than if they were to stay on to help transition and grow the business, Stern says.
A financial advisor can also serve as a business advisor, recommend a partner boutique investment bank or suggest a business broker to identify potential buyers.
“Some businesses are not saleable, but the owners may be able to sell the assets,” says Benturk. “An advisor can help evaluate the options.”
When planning to transfer business ownership, you also want to consider the implications for your family and your employees.
“Many buyers need the leadership team to keep the business running,” says Stern. “Business owners (who are selling) often want to fairly repay their key employees for their work in growing the business, so they’ll look for a way to cut the employees in on the deal.”
For example, a retention can provide key employees with an incentive to stay during the transition, or an exit bonus may be offered to provide financial support for employees who choose to leave.
Another option for sellers is to sell part of the business to your employees with an Employee Stock Option Plan (ESOP).
“At one company we worked with, the owners wanted to do something nice for their employees, so they did an ESOP,” says Benturk. “The sellers can defer capital gains taxes indefinitely, and the employees benefit by accumulating wealth and enjoying the pride of ownership.”
However, an ESOP may not be right for every business, especially one that has significant debt.
“But it can be an option to evaluate with your team of advisors,” says Benturk.
Selling a multi-million-dollar business comes with ramifications for income and estate planning, making it essential to evaluate all your options. An ESOP, for example, has tax benefits for the company, the owner’s family and the employees.
“One reason to have your team include tax advisors and estate planning professionals is that you may want to leverage estate planning before you structure the sale,” says Stern. “You need a really good tax professional to help you understand what the deal will mean if you sell the corporation, sell only the assets or transfer some of the business to your heirs through a trust before the sale.”
Understanding your retirement goals, your family’s financial needs and the true worth of your company can start you on the path to selling your business in a way that secures your financial legacy and protects your employees.
RBC Wealth Management does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in consultation with your independent tax or legal advisor.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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