By Andy Stockett

FourBridges was recently invited to participate in a Business Owners Summit in New York City focused on preparing a business to be sold. Hosted by Day Pitney law firm’s Corporate Department Chair Scott Beach, and Aron Weingard, Financial Advisor at Weingard Wealth Management of Raymond James, we discussed how business owners should be prepared to sell on a personal level, a business level and a financial planning level before moving forward with a transaction.

“After building and sustaining a business through countless hours of hard work and years of emotional and financial commitment to its success, many business owners neglect to plan and prepare adequately for how they are going to transition the legacy they have created,” said Scott Beach. “Early planning for the succession or sale of the business, and frequent reconsideration of those plans to account for unexpected familial, economic or industry changes, significantly increase the likelihood that the transition of the business will achieve the exiting owner’s objectives.”

Over the course of an afternoon, nine speakers and panelists covered topics that encompassed the full lifecycle of being a business owner, including lessons learned from the sales process, valuation, positioning a business for sale, and life after a sale. I weighed in with private equity colleagues on how to grow your business and maximize its value. Here are some key takeaways from our conversation that can help guide any business owner that’s considering a sale.

Personal Objectives

The roundtable included several business owners who have been through the sales process, and they all echoed the same advice: You need to have a good understanding of what your life might look like after the sale. Do you want to spend your time shaving a few strokes off your golf game, or do you want to stay active in the business? Maybe you want to carve out some time to do some volunteer work, or serve a business’s board of directors. What you probably don’t want to do is be left twiddling your thumbs, wondering what to do now.

Timing is equally important here. It’s smart to start planning even before you’re ready to sell, if only to obtain some sense of how your company might be valued and what you might expect to receive in after-tax net proceeds (cash in your pocket). You don’t want to be forced to go into a sale situation if you’re in the middle of a health crisis, or when your business isn’t in the best shape. So be realistic — about both the timing of the sale, as well as what your life is going to look like after the transaction goes through.

According to Beach, “Business owners should begin the planning process at least 2-3 years before the earliest point they envision exiting the business to ensure they give themselves sufficient time to analyze their options, determine their desired course and implement the appropriate estate and tax planning strategies to maximize the economic benefits of the transition.”

Financial Objectives

Once you’ve settled on what you’ll be doing after the sale, it’s important to make sure you’ve got your financial objectives laid out in order to achieve the standard of living you expect. This is where a wealth management professional, estate planning attorney and investment banking advisor can help. They’ll help you determine how much you need to make on the transaction in order to sustain the standard of living you’re planning on. And what, exactly, to include in your financial planning. Do you plan to travel, buy a second home or set up a 529 plan for your grandchildren?

Professional advisors can help you consider all factors involved, as well as mitigate the impact of taxes on your estate. “Typically, business owners are understandably hyper-focused on maximizing the value of their business,” said Aron Weingard, Certified Exit Planning Advi­sor™ and Certified Financial Planner™. “Unfortunately, they often neglect to focus on personal results. In fact, only 20% of business owners have integrated their business exit plan with their financial and estate plans. Without proper pre-transaction planning,” he continues, “business owners can lose millions for themselves and their families.”

Your team should also include an investment banking advisor who will help ensure that the valuation expectations on which your plan is based are realistic — or not. They can help you determine if your company is worth enough to achieve your financial goals, and how much available cash you can expect to have at close to sustain your projected lifestyle.

Business Objectives

On the business side of the equation, it’s important to make sure that all of your corporate records are in good shape. Are all of the shareholder stock certificates accounted for? Do you have good board minutes from several years past? If you switched from a C-corp to an S-corp, do you have the documents to prove that you filed properly with the IRS?

Don’t forget to go through your corporate records from a legal standpoint. Are there any big contingent liabilities out there? Make sure any outstanding litigation has been taken care of before you go to market. Are you compliant with sales tax collection policies? And are you comfortable there are no human resource or environmental issues that can delay a deal or decrease your company’s value? If your house is in order on a number of non-financial fronts, it will pass the “smell-test” and can help to avoid surprises for the buyer and the potential for a downward adjustment in purchase price.

Who is your ideal buyer?

When we ask business owners about what they’d like to get out of the sale, some will simply say the right price. Others are focused on preserving the company’s legacy, and retaining employees. An investment banker can help you find the right buyer to reach your specific goals. Just don’t make the mistake of taking the first offer you get. Creating a sense of competition isn’t just important to drive up the sales price, it covers your bases in case you hit a bump in the road with one buyer — often due to factors entirely outside of your control.

Is 2022 a good time to sell your business?

While a lot has changed in 2022, it’s still an excellent time to sell your business. Of course we’re seeing some softness in certain sectors as consumers reign in spending due to inflation and rising interest rates. Admittedly, consumer confidence is low and is on a bit of a downward trend. On the upside, there’s still a lot of dry powder out there, as the amount of private equity that’s been raised has continued to escalate.

According to Pitchbook, private equity funds went from $1.7 trillion of available investment capital (“dry powder”) in 2019 to almost $2.1 trillion in 2021. Meanwhile there were 389 new U.S. buyout funds raised in 2021. And corporate balance sheets continue to be strong with 8 trillion in cash that nobody wants to see sitting on the balance sheet — another big driver for mergers and acquisitions.

Whether you’re ready to sell your business yesterday, or a sale is still somewhere on the horizon, the time to start planning is now. Business owners often underestimate how complex the sales process is, from the amount of data they’re asked for to the intrusiveness of the questions lobbed at them. The good news is that there’s a lot of capital out there that needs to be deployed. The not so good news is that nobody’s just going to throw that money around. If someone is going to pay top dollar for your company, they’re going to cross every T and dot every I to minimize their risk as much as possible.

If selling your business was as easy as putting up a for sale sign in your yard, going through a quick inspection and calling it a day, it would make sense for business owners to go it alone. The reality, as many business owners soon find out, is much more complicated. We’re here to guide you through the personal, business and financial sides of selling your business in order to achieve all of your goals, financial and otherwise. Questions about the sales process? Get in touch.