Written by John O’Rourke, Vice President, Private Banking and Wealth Advisor
After spending years, or even decades, building your business from scratch, the time will likely come when you consider your exit strategy. Perhaps you’d like to retire or pursue other goals. Either way, to maximize the potential of the sale of your business, you’ll need to start planning well before you intend to sell. We highly recommend you consult your trusted financial advisors, such as First American Bank, to guide you through this complex process.
Here are four key questions to consider before planning your exit:
1. How long will it take to sell my business?
Selling a business isn’t something that’s done on a whim. Preparing to sell your business can take time. Thoughtful planning and implementation over a few years can greatly enhance your chances of a profitable and successful exit. Giving yourself enough time to design a smooth exit is key, and though it varies from business to business, the process generally takes about five to seven years. The sale will generate capital gains tax liability, so the first step is to reconsider your tax domicile while you have time to establish a new residency.
2. Who should I sell my business to?
The next step entails determining who your ideal buyer will be. The type of buyer essentially determines how the process will play out. Also, each type of buyer comes with their own unique benefits and considerations.
Selling your business to a family member
When opting to sell your business to a family member, it’s important to designate your successor as soon as possible. Have an in-depth conversation with your designated successor and make sure they are committed to the position and have the skills to successfully assume the role.
Once you have a firm commitment from your successor, you should start getting your new owner up to speed on their new responsibilities. This requires intense mentorship and a huge time commitment for both parties, especially the party that’s stepping down. A financial adviser can help ease transition by handling the nuts and bolts of the sale while you focus on mentorship.
Selling your business to your employees
Employers looking to sell their business to their employees typically do so through an employee stock ownership plan (ESOP). An ESOP is a great option for business owners who want to defer the cost of the capital gains tax. While an ESOP can take several years to implement, it can also provide the seller with favorable tax incentives by way of income averaging and/or deferred capital gains tax treatment.
Because an ESOP can provide a market for shares of a closely-held company, it’s also a viable option for owners who want to make a discreet and quiet exit, and value employee ownership. It can be a win-win for owners looking to sell their business to employees without having to market it publicly.
Selling your business to a third party
If you’re considering a sale to a third party, you’ll want to focus on taking steps that will make your business more attractive to potential buyers. That means boosting profitability, consistent and growing revenue and client base, long-term secure contracts, etc. A financial advisor can also give you an unvarnished assessment of your business’ worth and the changes necessary to increase its value ahead of a sale. This might entail identifying and cutting unnecessary expenses in order to drive profits. Demonstrated growth and consistent earnings underpin value.
3. What are the potential tax implications of selling my business?
When selling your business, tax considerations like the capital gains tax rate can drastically affect how much you pocket post-sale. For example, the capital gains tax rate is expected to rise as early as 2022, which means you might end up paying an additional 19.6% in taxes on the sale of your business if you sell after the proposed tax changes take effect. If you’re in a position to sell while the tax rate is still low, it’s a good idea to get the process started.
Tax considerations are just one of the factors where professional advice and planning can really pay off. For example, one business owner sold his company for upwards of $40 million in a state with a significant capital gains tax rate. Had the owner planned in advance and sought the right guidance, he could have established residency in a state with 0% tax and walked away from the sale with the extra $2 million they paid in taxes. That’s a major loss that could have been avoided.
4. I’m ready to sell in a few years’ time. What steps should I take now?
Business owners are best served by working with an accountant or financial advisor to make sure your balance sheets, financial statements, and other documentation is in order. By getting your finances ironed out, you’ll be ready whenever an opportunity to sell arises.
A successful transfer usually requires foresight, planning, and expert guidance. To get the most out of your sale, contact one of First American Bank’s advisors today.
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Disclosure: First American Bank is a Member FDIC.
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