June 8, 2023

Tammi Jackson

How to navigate personal wealth considerations while selling a business

For entrepreneurs and business owners, selling a business – or readying it for sale – is vastly different than anything they have sold in the past. 


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A complex process with many intricacies and factors to consider, it can resemble a theatrical performance that necessitates engaging multiple players led by a skilled stage manager. 

As a business owner, selecting that stage manager – a trusted advisor to serve as the project leader for valuation, offer, negotiations, closing and handling proceeds – can be critical. Their objective perspective, stripped of emotional attachments that a business owner may have after years personal commitment, sacrifice and investment, can be very important in navigating the intricate process.

Key considerations for success when selling a business

Once an advisor is in place and the decision to move forward with the sale is official, it’s time to think through key elements that can impact the sale.

Managing Influential Stakeholders: First, consider the diverse cast of characters – or stakeholders – in the transaction. In addition to partners and family who may be closely linked to the business, consider the value added from your employees, the business’ role in the community and customers. From individual desires and ownership stakes that can influence negotiations to on-team expertise, positive reputation and strong customer base, each stakeholder can affect the final sale value.

Setting Your Objectives. There is more to a business owner’s decision to sell the business than merely getting the sale proceeds. Closing with the best price for the business involves multiple decisions beyond simply value, and it’s a comprehensive strategy that begins before bringing in the broker. Additional objectives the buyer may wish to consider include valuation, tax implications, employment status and asset protection strategies.

Deciding to sell dictates many other decisions concerning the owner’s exit. The company can expect to be offered terms that may contain cash at close, a seller’s note, earn out and/or an equity rollover. The company can also be sold outright, or as an asset or stock sale. A founder might want to retain some control during the transition to the new owners. Or a buyer may want the owner to stay for a set duration.

Managing Fiscal Obligations: Contrary to popular belief, having the proceeds land in your bank account isn’t the final curtain call. How the money flows from buyer to seller can affect tax liability or overall company value. 

More specifically, depending on the structure of the transaction and tax laws, the way the proceeds are structured and received can have a substantial impact on the tax liability of the seller. For instance, receiving a lump sum payment upfront may result in higher tax obligations compared to structuring the sale as an installment payment or utilizing other tax-efficient strategies. Carefully considering the tax implications can help business owners optimize their financial position and minimize tax burdens.

Further, the way money flows in a transaction can also affect the perceived value of the company. Buyers often assess the financial health and a business’ potential for future success on its cash flow, profitability, and growth prospects. If the transaction structure or the flow of funds negatively impacts the company's financial metrics, it may lead to a diminished valuation. 

By defining clear objectives and working closely with advisors, business owners can develop strategies that seek to maximize company value while also aligning with their financial objectives.

Lining Up the Dream Team: Before bringing in the broker, get all other advisors lined up and ready for the show. The day-to-day CPA and legal counsel may have different specialties for selling a business, but a complex deal requires additional experts in specific transaction areas.

Some small business deals can have as many as five legal advisors, each specializing in a different aspect of the sale.

Bringing in your wealth management advisor early helps with decision-making as the sale progresses. You’ll also need a CPA to deal with the buyer’s diligence team, a tax advisor and possibly attorneys specializing in (mergers and acquisitions), real estate and your personal estate planning.

Planning for the Future: Also important is setting out realistic goals and strategies for what happens once the proceeds are delivered to personal accounts.

Many business owners know what they want to do when the money comes in – but are the expectations realistic? They may want to buy a larger home, a condo on the coast and a place in the Midwest. However, these decisions come with considerations ranging from tax liabilities, unexpected costs of transitioning out of the business and determining the amount of money left after burdens are satisfied. 

Defining post-sale goals is a big step forward. Selling a business makes for a different time of life and affects family decision-making. Understanding how the cash influx changes estate plans early in the process could impact how the sale is negotiated and executed.

Educating clients and helping them establish investment, estate preservation and personal goals are important steps in building a sturdy foundation for the business owner before the proceeds hit the bank account. Awareness of the potential potholes on the road to closing the sale is another service a well-qualified wealth advisor delivers. 

Getting ready for the next act

Selling a business is a multifaceted process that requires careful consideration. By approaching the sale with a strategic mindset and seeking  guidance from experienced professionals, business owners can  look to maximize the value of their business  and work toward a smooth transition into the next phase of their lives.


Author: Tammi Jackson is a Senior Wealth Advisor with BMO Wealth Management in Scottsdale.

Disclosures:

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Any views and opinions expressed are for general information only and are subject to change. 

Estate planning requires legal assistance which BMO Harris Bank N.A. and its affiliates do not provide. Please consult with your legal advisor.

This information is being used to support the promotion or marketing of the planning strategies discussed herein.  This information is not intended to be legal advice or tax advice to any taxpayer and is not intended to be relied upon as such. BMO Harris Bank N.A. and its affiliates do not provide legal advice or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.