Prepare for the Sale of a Business in 6 Steps

Often, a lucrative business opportunity comes along but
doesn't work out because the business owner hasn't
adequately prepared by building a sales strategy,
creating a tax plan, streamlining finances and making
provisions for the partners or family members involved.
Selling a business can create a unique liquidity event
and have a substantial impact on taxes, cash flow,
wealth-transfer plans and an owner's lifestyle.
To help you potentially maximize the value of a sales
deal and keep your assets protected, put a strategic
plan in place before any paperwork is signed.
Business owners should consider their time frame for
selling the business as well as the market.
Have a succession plan at least three years in advance
to give you time to get your business in order and be
ready for opportunities that arise.
Consider taking the following steps to prepare for the
sale of your business:
Related: 5 Things Business Owners Should Keep in
Mind With Succession Planning
1. Build a sales strategy with a wealth
advisor.
Advisors who specialize in this area can help you
maximize the financial and emotional value of the
business. Specialists can help you define a strategy in
alignment with your family’s goals and objectives.
Plus, a well-chosen advisor can help you assemble the
right team to sell your business. An unbiased advisor
can guide you throughout the process, from interviewing
investment bankers to bringing together all the legal, tax
and business experts.
2. Create a tax plan.
Selling a business can have a huge impact on your
taxes. If the gain on the sale is long term, a federal tax
rate of as much as 23.8 percent could be applied.
Additional state income taxes, where applicable, may
also be imposed on the gain. Doing tax planning before
selling might help in maximizing deductions and avoiding
penalties.
Work with a tax advisor before completing the sale to
establish your income expectations for the year,
calculate anticipated taxes based on projected gains and
determine if any estimated tax payments are required
along as well as year-end payments.
Remember that the value received from your business
will also be included in your estate after your death.
Federal estate tax rates of as much as 40 percent may
apply. Some states collect additional estate or
inheritance taxes.
3. Consider selling the firm over time.
To offset the tax impact, consider selling the business
on an installment basis. This involves collecting
payments over several years, allowing you to recognize
gains over time and potentially avoid higher tax
brackets.
This is most effective if you are confident the buyer will
be able to meet his or her future payment obligations.
4. Clean up the financials.
Before talking to buyers, eliminate financial items not
directly related to operating expenses. This can include
insurance or salaries for nonworking family members, as
well as cars, expense accounts and other discretionary
expenses.
If it’s not something the buyer would want to pay for, it
shouldn’t be there.
Related: The Key to Maximizing Return When Selling a
Business
5. Review the financials with an
accountant.
You can conducat one the following financial reviews
with an account:
A compilation, the least formal type of
assessment, involves a certified public
accountant's preparing financial statements based on
information provided by the business owner. The CPA
won’t offer any opinions on the data and will assume
everything is accurate. A compilation is useful
for evaluating internal goals but doesn't provide the
validation a buyer will want.
A review involves a more in-depth analysis of the
financial statements. The CPA provides an opinion of the
company’s financial status and identifies potential
issues. The review provides "limited assurance" that
nothing serious came to the accountant’s attention.
The most formal assessment is an audit, when a CPA
conducts a critical review of the company's
management and an independent verification of financial
information. An audit provides the highest level of
assurance that the financials are in line with generally
accepted accounting practices. This might be the best
option for owners preparing to sell a business.
6. Diversify your customer base.
As part of the business-review process, examine all your
vendor contracts, customer contracts, license
agreements, buy and sell agreements and other
arrangements that might affect a sale.
You want to know if any of your current business terms
will hurt or increase value for the buyer. Look for red
flags, such as a significant portion of sales going to one
or two customers. This could be considered risky for a
buyer, especially if the customers have strong personal
relationships with the owner.
Thinking about what you can do to make yourself less
relevant to the sales process may help you get the best
deal for your business.