Written by Aron Weingard, CFP®, CEPA®, AAMS®
Weingard Wealth Management of Raymond James
Building a successful business is a dream shared by many. Entrepreneurs invest their hearts, souls, and significant financial resources to turn this dream into reality. The eventual sale of their business is often the most significant transaction of their lives. As a result, business owners are hyper-focused on maximizing the value of their business. Unfortunately, they often neglect to properly plan, and they miss out on opportunities to enhance growth, protect value, mitigate taxes, and plan for their families.
What many business owners fail to realize is that effective business exit planning begins years in advance. In doing so, they unlock the full financial potential of the sale. In this article, we unveil a comprehensive guide to seizing this monumental opportunity.
1. Establish a Cohesive Collaborative Team of Professionals
To harness the synergy of the “7 Secrets to Maximize Your Sale,” it is imperative to assemble a cohesive team of professionals well before a sale process begins. Business owners are akin to owners of a professional sports team, as hiring the right coaches and players is critical. Just as a franchise relies on seasoned coaches who work well together to maximize a team’s potential, entrepreneurs need a collaborative team of professionals – financial advisors, estate and M&A attorneys, CPAs, and investment bankers – to navigate the complexities of selling a business. Critical personal, legal, tax and business considerations exist that must be carefully coordinated throughout the process.
Explanation: Without a collaborative team in place, business owners will not receive well-rounded, thoughtful advice and often do not plan appropriately to mitigate taxes, preserve intergenerational wealth, and enhance or protect business value. Without a cohesive team, the entrepreneur will receive different advice from different people, who likely lack comprehensive context. However, when professionals specializing in business owner exit planning work harmoniously, they seize opportunities and avert potential pitfalls.
2. Use Your Financial Plan as Your Compass to make Business and Personal Decisions
Most people move through their financial lives unknowingly wearing a blindfold. The personal financial plan removes the blindfold by revealing their current financial trajectory and guiding families in making informed financial decisions for the future. The foundation of a financial plan is highly customized, incorporating the entrepreneur’s financial goals, post-sale cash flow needs, tax status, asset allocation, insurance, and other income streams. Furthermore, the planning process compels entrepreneurs to articulate their desired future. Using this framework, you can model and contemplate different sale scenarios, including those related to cash flow and initial net sale proceeds, as you determine how much rollover equity to retain after the transaction. Additionally, the financial plan can help identify tax mitigation opportunities.
Explanation: A financial plan is critical for everyone, but it is arguably more important for an entrepreneur in the exit planning process. By quantifying the net proceeds needed from a sale and understanding your wealth surplus, it becomes a powerful instrument to answer key questions:
1. Net Proceeds: What is my number? In other words, how much do I need from a net proceeds standpoint to live the life I want to live?
2. Wealth Surplus: How much, if any, will be left at the end of my life? The answer to this question informs and opens the door for income, estate, and capital gains tax mitigation opportunities.
Additionally, the financial plan projects net worth / estate tax exposure and includes an inventory of assets and associated cost basis. This information assists financial advisors and estate attorneys in advising on which shares to gift, when to gift, and through which estate planning techniques. In doing so, the financial advisor will help the entrepreneur maximize sale potential and protect the family legacy by employing a coordinated approach to wealth management, tax optimization, estate planning, and asset protection.
3. Significantly Save in Taxes through Pre-transaction Planning
There are far more tax mitigation opportunities available before a transaction compared to after a transaction.
Starting early offers a broader array of tax-mitigating strategies, which can be chosen based your unique wealth surplus size, business entity type, charitable intent, and wealth transfer vision.
Explanation: Proactively mitigating taxes ensures higher after-tax proceeds. Early planning empowers you to employ strategies such as gifting, estate freezes, valuation discounting, and strategic sale structuring, thereby preserving more value of your business.
A Tax Mitigation Analysis process spearheaded by a financial advisor typically takes 4-6 weeks. It involves collaboration with a CPA and tax attorney, resulting in a memo that educates the entrepreneur and family about the pros, cons, and tax savings associated with each recommendation.
4. Get Your Legal House Ready for the Sale
Preparing for the sale of your business involves more than just financial considerations. Ensuring legal compliance is invaluable because neglecting it can lead to issues arising during the due diligence process, potentially diminishing the company’s value – or jeopardizing a deal.
It is imperative to hire a seasoned M&A attorney – one who can collaborate effectively with your financial advisor, investment banker, CPA, and estate attorney. It is extremely valuable for your legal advisor to understand a buyer’s perspective and anticipate issues that could adversely impact value. Addressing and remedying these matters in advance of the sale process ensures a smooth transition upon exit.
Explanation: An experienced M&A attorney plays a crucial role in guiding a reverse sell-side due diligence process. They assess the strengths and weaknesses of your company from the eyes of a buyer, who will look to identify and raise issues that could reduce value. The pre-sale diligence process examines critical legal areas of a business: ownership structures, employment agreements, customer and vendor contracts, regulatory compliance, tax, IP, and data security / integrity. A well-executed legal review, integrated into a broader coordinated exit planning timeline, provides you and your company time to address issues in advance rather than fall victim to their rise during a sale negotiation.
5. Establish Investment Banking Relationships Early
Most business owners are often unaware of the significant advantages of collaborating with an investment banker prior to initiating a sale process. By developing robust relationships with investment bankers, you gain guidance on market conditions, learn what buyers are seeking, and identify aspects of your business that require strengthening before the sale. This strategic approach can enhance the value of your business and build invaluable relational chemistry that will pay dividends down the road with your banker.
Explanation: Regarding value enhancement, the banker plays a crucial in helping the entrepreneur prioritize strategies and investments related to products, personnel, technology, and customer focus. Their understanding of buyer and capital provider perspectives ensures and improves sale price. In addition, a banker with deep industry sector knowledge possesses a buyer network, with which seeds can be strategically planted to enhance the attractiveness of and excitement about a business before the official banking process launches. Collaborating months or even years in advance builds rapport and instills confidence in hiring a banker – an approach superior to making a rushed decision after presentations and dinners with various firms.
6. Make Your Strongest Valuation Case
A Quality of Earnings (QoE) report aligns financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”), presenting the numbers to buyers in a consistent format. This CPA-led process takes a deep dive into a company’s financial and operating information, emphasizing earnings before interest, taxes, depreciation, and amortization, or EBITDA. It provides insights into the trends and sustainability of a company’s financial performance. The QoE report ensures accuracy, transparency, and a compelling financial narrative of past performance and a promising future financial trajectory. Imperatively, it defends the company’s valuation during buyer due diligence.
Explanation: Potential buyers are more likely to offer favorable terms when they have confidence in the credibility and sustainability of a company’s earnings. This proactive approach allows business owners to address any issues and present a more attractive financial profile to potential buyers. Early analysis also provides sufficient time for implementing corrective measures. A thorough QoE analysis by a CPA helps minimize surprises during the due diligence period. By identifying and addressing financial concerns beforehand, business owners can instill confidence in potential buyers, making the sales process smoother and potentially improving the deal terms.
7. Understand the Benefits of a Proactive vs. Reactive Sale Process
In a reactive scenario, a business owner receives an unsolicited offer for their business and sometimes attempts to negotiate a sale price independently. However, this approach poses multiple problems because many of the “7 Secrets to Maximize Your Sale” will not have been employed. These secrets include but are not limited to: identifying legal issues that could reduce your company’s value before the sale process begins, using a financial plan as a compass to understand the net proceeds needed from the sale, and implementing pre-transaction tax mitigation strategies. Importantly, in this reactive scenario, the business owner lacks full leverage because there may be only one or two potential buyers. Additionally, you will need to engage professional advisors who will need to be brought up to speed and may have suggestions. This will take time, and time kills deals.
A proactive sale process requires an investment banker, who brings expertise to navigate the complexities of a sale, which is essential for maximizing the potential of the sale. The banker’s role extends beyond positioning the company and articulating its value trajectory. Rather, a seasoned banker excels at identifying a global buyer universe and strategically creating competitive buyer tension. This approach optimizes price, terms, alternatives, and cultural fit with potential buyers. To facilitate this process, a financial advisor that specializes in business owner exit planning can help you access potential investment bankers, streamlining your path to selecting the right banker for you and your business.
Explanation: The knowledge, network, and experience required to successfully run a company differ significantly from what is needed to sell that same company. The investment banker will lead activities that you likely do not have the bandwidth or expertise to execute on, such as preparing the company for the marketing process, structuring the business, interacting with buyers, and negotiating multiple term sheets. Importantly, the banker’s experience and credibility mitigate the risk of business owners ending up with unfavorable terms when selling independently. These often-overlooked terms can relate to personal liability/indemnification, cash payout vs. rollover equity, new employment agreements, and integration with the new company. Within business exit planning, a financial advisor serves as the head coach, serving as the glue that binds strategic conversations and coordinates the efforts of the team of professionals. By implementing these “7 Secrets to Maximize Your Sale,” business owners can navigate the complexities of selling a business, ensuring that their exit is not only financially rewarding but a legacy-fulfilling achievement.
ARON WEINGARD is a Managing Partner of Weingard Wealth Management of Raymond James, alongside his brother, Robert, and mother, Nancy, who founded the practice in 1996. He specializes in guiding business owners and high-net-worth individuals and families. Aron has expertise in business owner exit planning, inflation and liquidity event tax mitigation. He is often invited to speak regarding these topics in publications and at national wealth management and investment banking conferences. Aron is a mentor for the Raymond James Institute for Business Owner Excellence MasterClass, helping to train wealth advisors in business owner exit planning.
Outside of the office, Aron was recognized in 2022 as America’s Most Charitable Wealth Advisor Under Age 45. Awarded by the Invest In Others Charitable Foundation, this recognition is presented to an advisor 45 years of age or younger who has made a significant impact in communities across the country and around the world. Aron earned this award for leading and helping to build the nonprofit, Experience Camps for Grieving Children, since its 2009 inception.
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