Article published with permission from Tidwell & DeWitt and Ran One
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Four Pitfalls to avoid, when selling your business
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Your business would not have been as successful without the assistance of advisors - it is a fact most owners recognize. From mentors or industry leaders that helped you start to attorneys and consultants helping you to continue to grow and adapt your business, advisors, due to their experience and knowledge within specialty areas, are essential in growing a business. Why, then, would you treat exiting that business any differently than, say, consulting with an attorney prior to purchasing a building, or an M & A Advisor when absorbing a mid to large sized competitor?
It is essential to a successful exit that you choose your team wisely - the protection of your wealth is at risk. Potential advisors, and their specialties and knowledge base, must be interwoven by you, the owner and "manager" of your team, in order to ultimately be most profitable to you. Remember that it is most effective to be pro-active with your exit strategy planning – the best first step that can be taken is the careful assembly of your advisory team.
Nearly every exit strategy – whether an internal or external transfer – will include certain advisors. The list of advisors offered here should get you thinking about who can assist you and how you should begin to assemble your team. We begin with legal counsel:
- Attorney - An attorney's specialty lies in legal agreements in the transaction as well as advice on estate planning documents involving the titling of assets (though ideally this would be a separate specialist, perhaps from the same law firm). Attorneys may also provide guidance on gifting strategies, or handle letters for an Irrevocable Trust.
- Accountant - Provides tax assessments for each exit strategy option, and can help determine the best post-tax option for the seller. The accountant may also be called on to provide cash flow projections for the company as part of a deferred payment arrangement –this is particularly relevant to a management or family member buyout. This accountant can be either the one currently used by the company, or one who specializes in the tax implications of exit sales.
- Financial Advisor - A Financial Advisor provides personal financial retirement projections and a strategy for the re-investment of exit proceeds. This income replacement strategy is critical as the exiting owner is trading business income for passive income from investments. This financial advisor will help you to determine your true financial needs after the exit, and guide you toward diversifying the proceeds from the sale of your single largest asset- your business. In objectively showing that you will need "X" amount to generate a comfortable passive income, your advisor can assist you in determining the net - post-fees and taxes - sales price of the business that you will require.
- Insurance Advisor - Provides recommendations on life insurance policies, key-man or employee policies, business policies, as well as long-term health care policies–all of which are risk management tools meant to protect the owner's wealth.
- Mergers and Acquisitions Advisor -Offers insight into the current marketplace for sale transactions, and can provide honest feedback on the viability of an external sale. M & A Advisors also provide pricing comparisons for sales of similar companies as well as the environment for a sale of the existing business given its industry. These advisors are also asked to provide input for the structuring of internal transactions such as employee stock option plans (ESOPs) and management buyouts (MBOs).
- Valuation Advisor - A Valuation Advisor serves in a similar capacity to the M & A advisor in evaluating the company's worth, but is used primarily in an internal role. He/She provides a Fair Market Value assessment of the company for purposes of measuring the viability of certain internal transactions, including ESOPs, Gifting Programs and long-term buyouts.
When calculating your desired net profit from the sale of your business (i.e. the amount that you keep in the deal), you should recognize that the fees associated with each of these advisors are a necessary part of any exit strategy plan. It is best to treat these fees as an investment in a successful exit – the same way you perceived the advisory fees as you were growing your business.
In fact, advisory fees and taxes (both long and short-term) are the largest obstacles standing between the sale price (what an owner gets) and the actual 'in pocket' net value to the owner (what he keeps in the exit). By knowing these fees in advance of your exit, you will be able to turn these obstacles to your advantage, and by choosing and utilizing a strong advisory team, ideally make them more than pay for themselves.
So, whether you are ready today or not, your planning needs to account for your mental readiness for a business exit. When you have this awareness, your options can be examined to fit your personal needs and circumstances.
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Your Exit Advisory Team - Key Members
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Copyright Henberger Group Inc.
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