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When considering the future sale of a business, there are many steps to consider. You've worked hard to get your business where it is today — you owe it to yourself to approach its sale deliberately.

If you are considering a future transition out of your business, it is critical to plan strategically years before engaging with potential buyers. Here are the important steps you can take to ensure your transition will go as smooth as possible.


Step 1: Assess the Marketplace


When evaluating the market, start with your own industry, then look at the broader economic climate. What’s happening with capital markets and consumer confidence levels in your community, your region, throughout the country and even around the world that might impact a future sale of your business?


Are your balance sheets getting stronger? Is the valuation of your business rising? Taking a close look at the growth of your business—and the industry overall—can inform your opinion on the potential for continued growth.


Make an initial list of potential buyers to consider, including family members, managers and competitors, or other businesses if you want to consider a merger. Another option to consider is an employee stock ownership plan (ESOP), which can help create a market for your shares and provide tax benefits.


Step 2: Assemble Your Team of Advisors


You may already have certain professionals in place to guide your business, such as a CPA, an insurance agent and a wealth manager. When preparing for a transition, it can also be invaluable to have an estate planning attorney and a business attorney as part of your team. Choosing one key advisor to lead the group is advisable because it can help coordinate efforts and ensure you have the appropriate team members in place.

By assembling your team early in the process, you can select knowledgeable professionals who you feel comfortable with while gaining experience working with them. Your advisors will also have more time to get up to speed on your business, its history and its financial picture.


While every member of the team is important, don’t underestimate the importance of having competent tax professionals ensure you structure the transaction in a tax-efficient manner. Your tax professionals will also be invaluable when reviewing proposals and letters of intent.


Step 3: Prepare Your Business


With your team in place, you’re ready to prepare your business to maximize its sale value. This includes a thorough review of fundamental metrics and important documents; a talent management assessment; and an in-depth look at the reputation of your business. You’ll want to leverage your advisors’ skills and expertise to handle these specific tasks.


Evaluate Your Business


Look for any potential issues that might delay or adversely affect your sale. Have your business and personal tax returns reviewed by a professional. Consider any state and local tax issues, as well as any “tax nexus” issues if you do business in other states. Prepare a sell-side quality-of-earnings report to provide transparency for potential buyers, and confirm there are no liens or encumbrances affecting the company’s assets.


You should also evaluate your corporate structure as early as possible. If you are a limited-liability company (LLC) and are considering converting to a C-corporation to qualify for a Qualified Small Business Stock (QSBS) federal capital gain exclusion, consult with a professional on the potential benefits and drawbacks of this option.


Review and Organize Important Documents


Make sure the business’s financial records and corporate documents are accurate and up to date. Documents that may require review include state incorporation documentation, equity ownership records, minutes and other corporate formalities. Check whether any equity holders are entitled to rights of refusal or other rights that could impact a sale, and confirm that key intellectual property is properly owned and registered.


It is also important to review existing contracts for expiration dates and ensure key relationships are covered. Confirm whether a sale could trigger any change-of-control or anti-assignment provisions. Such provisions may be present in agreements with key suppliers, licensers of intellectual property, lessors of capital equipment and, very often, lenders. In addition, employment contracts for senior management may contain provisions that trigger a payment and/or termination if the company is sold. Make sure you have all of this key information in a safe place that is easily accessible when needed.


Step 4: Obtain a Valuation


Work with a business broker to conduct an informal valuation of your business. Often, you can get an estimate or a range of probable sales prices early in the process, which will give you an idea of the value and allow some time to make adjustments to address issues.


When you are ready for a formal valuation, hiring a qualified, credentialed and experienced business appraiser is key.


Work with your tax and accounting professionals to track and confirm the accuracy of basis calculations, and work through any adjustments to your business’s earnings before interest, taxes, depreciation and amortization (commonly referred to as EBITDA) now rather than closer to the sale.


Armed with the valuation and basis figures, you can determine a reasonable range for potential offers.


Step 5: Prepare Personal Financial Forecasts


Next, make sure that the figures you determined are a reasonable range for potential offers and represent the minimum amount for which you would sell your business, as well as if it would satisfy your cash flow and other needs.


First, determine the amount of funds needed to meet your personal finance requirements, including your living expenses, other anticipated spending (as well as a cushion above your known spending needs), and your goals for leaving a legacy for your family. These considerations will have a substantial impact on your bottom-line figure for the sale.


Look at anticipated net-cash proceeds, after debt payments and expected tax obligations. Too often,in the thick of negotiating the deal, sellers focus on the gross proceeds, forgetting to factor in the impact of debt payments and taxes. To gain an accurate idea of the lowest acceptable sales price, it is critical to engage your accountant in forecasting the myriad of taxes that you and the company may incur.


Step 6: Advise and Prepare Your Family for the Transition


If you have family members who are involved in the business, inform them of your plans sooner rather later. When this step is overlooked, the eventual sale can be a source of contention and ill will among family members for generations. Once you’ve shared your plans, we encourage you to maintain communication and keep your family involved as you make key decisions.


Consider whether it is appropriate to make family wealth transfers no later than this stage of the process. Such transfers are often viewed solely as a tax-saving strategy, but they can also help prepare the family to be stewards of the wealth. If the business is staying with the family, consider transferring ownership interests to children and subsequent generations prior to the final transfer of management and control. The role of the estate planning attorney is essential to this process.


Step 7: Engage with Prospective Buyers


When you have been deliberate about all of the planning steps leading up to this point, you have the luxury of being able to interview prospective buyers and entertain bids based on more than just the offer price.


For many business owners, knowing their employees will still have a job after the sale is important. You’ll also want to consider how a sale to various potential buyers could impact your business’s reputation in the future. Finally, consider whether you want to continue to have some sort of role in the business after the sale.


All of these factors may influence your decision as you consider potential buyers—in addition to who can meet your bottom-line sales figure.


Step 8: Structure the Transaction


Once you have identified a buyer, you’ll need to ensure the deal is structured in a manner that considers all of the potential tax and financial implications. Consider the following questions:


• Will the business’s form of organization change?

• Will the deal be a buyout or a reorganization?

• How will the payment be structured?

• Is a stock sale or an asset sale more desirable?

• Will you maintain an ongoing consulting role?

• Is there a need to have non-compete agreements in place after the sale?


Remember that you’ve invested valuable time and effort into your business as well as planning for the sale. Stay committed to structuring a deal that achieves your goals and advances your best interest.


Looking at the Big Picture


Selling or transferring ownership of a business is an intricate process. To effectively transition your business, you should diligently work through each of the eight steps discussed above. Certain steps may look slightly different for each business owner. This list provides an overview of each step and the action items involved, as well as the timing and key players you'll need to be successful.


At BNY Mellon Wealth Management, we are here to help business owners with all facets of this process—from the practical steps to emotional decisions. We would welcome the opportunity to serve you and your family through this transition.

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The information in this paper is as of December 2023 and is based on sources believed to be reliable but content accuracy is not guaranteed.

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