Selling a business can be complex. Not unlike anything else in your business life, selling a business needs a strategy and a tactical plan. In this post, I’ve shared four key questions owners should consider before doing so.
The thought of spring cleaning can invoke a variety of reactions. Some are excited by freshening up and seeing things anew, while others groan and dread the very thought.
The same reactions are often exhibited when a business owner discusses succession planning. The business owner must take a spring-cleaning approach with a well-thought-out plan to avoid many common pitfalls.
While the owner may be excited about the prospect of selling their company, it takes more than that to be successful. There are several areas that they should consider addressing before approaching a sale.
Is there successor management in place?
Business valuation professionals will examine objective and subjective factors when determining company value. One of the essential emotional areas is company leadership, mainly if the owner is no longer actively engaged. Is the management team sufficiently experienced? Do they have client and industry relationships to continue their current performance levels? This can be particularly important if the selling owner is responsible for generating a significant portion of historical sales. How will this be replaced?
Does the company employ other family members?
If so, what is their plan going forward? Are they paid a market salary? Do they have an ownership stake that must be worked out during the transition?
Are the financial records in good order?
The line can sometimes blur between company and personal financials. When preparing for a sale, clarifying those lines and ensuring the financial statements reflect the company’s operations is essential. Some questions to ask:
- Are there items being paid by the company that will be paid by individuals post-sale?
- Is there property owned by the company that will not be part of the sale? This often applies to real estate holdings.
- Are there tax strategies that minimize or maximize company earnings that do not reflect the go-forward organization?
- Are there assets, such as patents, owned by individuals that the company relies on? Will those become part of the company?
Does the company have clients or suppliers at risk if ownership transitions?
Does the company have a concentration risk with significant revenue tied to a small number of clients or contracts? If company ownership transitions, are they at risk? It may be an excellent time to review agreements with key clients and suppliers to understand any change of control provisions and take action to avoid potential issues.
This isn’t an exhaustive list. The selling owner may want to engage a sell-side advisor to help them understand how to maximize company value, best position it for sale, and structure the transaction. Planning is critical, especially for something this important.
Questions? Comments? Start the discussion below!
Through its president, Cindy Fields, TEP, CFP ®, CWPP, CLU, ChFC, CLTC, RHU, REBC, MBA/Finance, and a licensed insurance broker, Loyalty Alliance is serving as a clearinghouse for insurance-related content. We thank Principal® for providing the content above, which we have adapted for this blog. It is relevant for all business owners wherever they are in their journey. Contact us to discuss solutions to YOUR needs.
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