What and When to Prepare for Selling Your Family Business

Posting by Joel C. Susco, CPA, Principal

If asked the question, most business owners would affirm that their ultimate motive in owning a business is to build it in such a way to allow them to leave a legacy for the future.  In addition, in an ideal world an owner would want to transfer it to another without any significant negative financial impact and with the possibility of retaining some control in the operations of the business.   Alternatively, new owners  would like to grow the business in such a manner to allow them to eventually recoup amounts that they have invested into the business and to grow the business in such a manner to increase their personal wealth.

HOW Will the Business Be Sold
Now, is it time to make the grand exit?  You have made the decision to sell your business, now what?   Often, owners of a business ready to retire are unaware of the many options available to them as an exit strategy.  Family-owned businesses especially frequently think that the only option available is to leave the business to another family member.  More thought needs to go into the decision making process.  The family owner’s motive will help to formulate what they should do.

Does the owner really want the business to stay within the family?  Or, does the owner want to sell the business to a long-standing loyal employee? Or, maybe there are no family members to carry on the business so a third party purchaser is the only option.  Perhaps the owner is quite charitable and would like to set up a trust to help transfer the business.
Unfortunately, many owners are not aware of the options available to them and thus may miss a golden opportunity associated with the right transfer at the right time.  However, no matter what the ultimate decision may be, there are some basic considerations owners should undertake to make any transition a smooth one.

Selling a Business is a Process

It is important that the seller know their options.  They must understand the process of transferring the business.  They must understand that it is a process and not just an event.   It will take time, and the transition may not transpire in the manner anticipated.  However, in this type of transaction, the seller tends to be more involved in the transaction, hoping that the transaction will work to allow the company to continue, thus allowing for that desired legacy to continue.

The owner must be realistic to the fact that after a purchaser has been identified, that purchaser will begin their due diligence to review the books and records of the company.  The seller must be aware that the buyer will most likely unearth some potential roadblocks that may sidetrack the transaction.  The transaction will not be finalized until such time that the buyer and seller have resolved such matters; thus it is important for the seller to be prepared for such roadblocks.

WHAT to Prepare Before Selling the Business

Therefore, before any ink has been set to paper, the seller of a business should have considered certain aspects to help reduce any major roadblocks during the due diligence process.  Some items to consider are:

• Obtaining an independent valuation for your business, to make sure you know what your business is worth.

• Making sure that your business plan identifies strategies for the potential of changing market conditions.  Show the potential buyer that you have thought about fluctuations in the economy and the impacts to your business.

• Making sure all tax filings are up-to-date, by having a recent audit or review of your business performed by an independent CPA.

• Making sure all vendor contracts, licenses and permits, and asset ownerships are all up-to-date and current, to reduce any stumbling blocks during due diligence.

• Properly documenting all related party loan agreements.

• Considering the necessity of current employees for the continued existence of the entity, and any need to negotiate their continuance with the new company.

• Making sure all employment agreements, confidentiality agreements and internal control documents are up-to-date to help clarify business practices.

The time to prepare for a sale of your business is when you are not ready to sell.  Making sure the above are up-to-date will help reduce any roadblocks when that day finally arrives that you are ready to retire from the business.

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