How to Successfully Sell Your Small Businessby
Whether they're looking to retire or are simply ready for their next career move, clients who own small businesses may decide they would like to sell their company. Financial planner Bryce Sanders explains how you, the accounting professional, can help your client ensure their sale is a successful one.
You’ve heard it before: “All my wealth is tied up in the business.” Imagine you owned an antique shop full of valuable stock. There’s value in the aggregate, but you don’t see any money until someone takes the stock off your hands. As an accounting professional, you can both help your client prepare their small business for sale and help them preserve the proceeds of the sale as a legacy for themselves and their family.
Your client doesn’t own an antique shop. They run a service business. The business valuation is based on a multiple of their net revenue. Revenue is generated by their client base. Put another way, their clients need to stay with the business and keep spending.
Preparing the Business for Sale
Professional athletes are people working alongside you who one day decide to compete in the Olympics. They are people who spend years training, getting themselves in peak condition for that one event when they will compete and be judged. Selling a business follows the same logic.
Preparing to sell the business starts years before the actual event. Your client needs to reduce and manage expenses. They need the best credit rating possible. They need to increase sales and collect outstanding debts from late payers. The buyer will want to see a few years of results, not just one year.
Let's take a step back, returning to the time your client said: “Someday, I want to sell my business.” There are several ways this could work:
- Sale upon death. Your client has partners. They will want to continue the business, yet understand they need to buy the portion of the business owned by your client’s estate. The business purchases key PERSON life insurance policies for this purpose.
- Sell to the employees. The owner sets up an Employee Stock Ownership Program (ESOP). Employees may receive some shares in this privately held company as part of their compensation, but the bulk of the money may come from bank financing. The employees directly or indirectly buy the business, and the owner is paid the agreed-upon amount.
- Merging the business. Your client may combine with another firm, receiving shares for their proportional interest in the combined firm. There may be a buyout agreement is place allowing the new partner to sell their share to the other partners at an agreed-upon amount after a specified time. This is important because of client retention.
- Business sale. It’s possible someone might approach then owner with an unsolicited offer, but it’s more likely they will work through a business broker to find a suitable buyer for the business. Since valuations play a key role, as their accountant, you will be closely involved.
The sale will be structured. A key component will be continued revenue, meaning the current clients need to stay and continue doing business with the new owner. This will be spelled out in the agreement of sale.
As their accountant, you will be advising your client on the structure of the sale for tax purposes. If your client receives shares in the combined business, they may avoid a taxable event, but they don’t have any cash in hand. Their fortunes are tied to the success of the new owner.
If they want cash in hand, you will be helping them structure the payout to minimize tax consequences. This often means they will collect their money over several years, which aligns to the concerns about client retention and sustaining revenues. Ideally the funds are set aside and ring fenced, in case the new buyer gets into financial trouble.
Investing the Proceeds
Your financial planning skills are important long before the cash payment is made. Your client will consider several factors:
- Preserving wealth for future generations. They will not want their windfall included in their taxable estate, especially if the laws concerning exemptions change. They may choose to place sums of money in trusts for the benefit of the next and future generations.
- Charitable giving. Your client wants to create a legacy. They might give money directly to nonprofit institutions. Large gifts often come with naming opportunities, especially during capital campaigns. They may choose to setup a charitable trust so they can record a donation immediately, yet choose which charities will receive money that is dispersed over time.
- Hybrid vehicles. Your client might be concerned about providing for their spouse’s income after they are gone. They might purchase an annuity for this purpose. They might make this purchase with a charity in mind, providing income for the recipient, a gift to the nonprofit and a tax deduction today.
- Put the money to work. The cash will need to be put to work. This involves investments. Your financial planning background and fiduciary approach will be valuable. Together with the client, you can develop a financial plan moving forward and present a proposal how you think the money should be invested. They can invest on their own or choose to work with a licensed financial advisor.
As their accountant, you are in a position of great responsibility. You are helping prepare the business for sale, advising them on the structure of the sale and helping them invest the proceeds.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.