When you’ve run a business for many years, its day-to-day operations consume the lion’s share of your attention and focus—as they should. There’s always life after business, though, and it can be hard to find the time to consider how and when you’d like to transition out of ownership, much less how you’d like that transition to look.
Do you have plans to keep your company in the family or sell it to employees? Are you more likely to consider an outright sale to a third party, such as a private equity group or another company?
Each of these transition scenarios can have very different impacts on your overall financial strategy and understanding how each scenario can play out is critical for any business owner looking to sell. Whatever exit strategy you are considering, it’s important to start the due diligence process years in advance. Waiting until the eleventh hour, or even worse until your hand is forced, can cost you dearly.
Tapping into the knowledge of a seasoned financial advisory firm with experience in succession planning can provide immediate and ongoing value in how you position your business for a sale. Plus, financial advisors can help you understand the broader market dynamics at play. Having your finger on the pulse of the market can be a critical factor in maximizing the valuation for your sale.
Drill Down to Your Core Objectives
“How much is my business worth, and how much can I get for it?”
It’s the first question many owners ask when considering the sale of their business. The trouble is, there can be significant disparity between these two figures. Having an objective business valuation conducted by someone who has no incentive to sugarcoat their advice, like a fiduciary, is a critical first step.
At times, the “sticker price” can be less important than the timing of the sale. Smart planning can increase your bottom line and reduce your tax friction—optimizing your personal wealth management and estate planning goals in addition to helping your business.
Another avenue of consideration is how you want the business to look and run after you’ve given up the reins. Do you want ownership to stay in the local community? Do you want written protections in place for your employees? How long, if at all, do you want to remain involved?
Some transitions involve selling to an entity who may not have the roots in your community that you have. Some may require you to stay on the board for a period of time. Either scenario requires mental preparation and giving up control as you watch others take over your “baby” and transition you out of making decisions on your own.
Experienced financial advisors have seen many business successions and sales and know the sticking points many owners face when they go in unprepared. Any business sale or succession plan is both a major life event and a major financial transition. Impacts on your current investment and wealth management plan, as well as tax considerations, need to quickly jump to the forefront of your strategy for the transition.
How a Sale/Succession Can Be Structured
For successions within your family, the process focuses mainly on timing and legal structure. You’ve nailed down who you want to run the company, now it’s time to answer the questions of “when” and “how”.
While you can gift a company outright to a successor, this can come with a greater tax bill. Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) are popular among intergenerational companies, allowing for more liability protection and more freedom in passing along multiple asset classes (such as securities, real estate, and equity interests) in one vehicle.
Seeking outside counsel on how ownership percentages, non-voting stock, and board representation should be structured is still advised, even for what seem to be cut-and-dry succession plans. Having someone outside the fold who is only incentivized to seek out your best outcomes can be a huge asset in making sure family and business control issues are in concert.
Selling a business to a third party typically goes one of two directions—via a stock sale or an asset transfer.
Buyers will generally prefer asset sales, as it gives them an upfront tax incentive by allowing for a step-up in cost basis for physical assets. Sellers in an asset transfer or sale, however, will face a higher tax burden. In these instances, some or all of the compensation will be taxed as ordinary income as opposed to capital gains.
Asset sales involve more preparation and paperwork, as each asset’s title transfer must be handled independently. Examples include permits, contracts, and intellectual property rights. Buyers in asset sales can reduce their liability for unforeseen future events through upfront due diligence, as the corporate title will still be held by the selling owner.
As a seller, assuming your company is an S-Corp or a C-Corp, you’ll likely gravitate toward selling it as a stock sale. This will classify most of your proceeds as capital gains, affording you a lower tax rate. But in a stock sale, the buyer loses the potential for cost basis step-up. This reduced flexibility can bring down the purchase price from what an asset sale could achieve.
These opposing incentives often meet up at the negotiating table. Having a business and succession planning strategist, in addition to the legal and tax professionals you may already have in your inner circle, can prove invaluable to your bottom line. A financial advisor will be able to look at the whole picture objectively, offer insight on current market dynamics, buyer appetite, and private capital flows, and help you assess how your business sale will impact your retirement and estate plans.
The Power of a Partner
The in-house focus practice for Business Owners at SYM financial has worked with buyers and sellers of multiple companies and has a deep understanding of the incentives for both parties. We believe that having the ear of a fiduciary that has walked others through the same processes will ease the immense burden you will feel when facing the sale of your business. You don’t have to face these decisions alone, and you don’t have to understand all of the resulting financial nuances yourself. We welcome the opportunity to share our knowledge with you, whether that is through an initial consultation or a deep-dive corporate valuation and succession plan.
Disclosure: The opinions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. This material is not financial advice or an offer to sell any product. SYM reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This blog is for informational purposes only and does not constitute investment, legal or tax advice and should not be used as a substitute for the advice of a professional legal or tax advisor. Information was obtained from third party sources which we believe to be reliable but are not guaranteed as to their accuracy or completeness. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.