Never too early to start planning your exit strategy
By Paul Keller
Guest Columnist
You started your business with dreams of making millions. When the time comes to sell, you will want to keep as many of those after-tax dollars as you possibly can in exchange for your blood, sweat and tears. Advance planning can make a big difference in the amount you pocket after the sale of your business.
Consider this: Under prevailing tax rates, Owner A sells a business for $1 million in cash and nets $800,000 in after-tax proceeds. Owner B also sells a business for $1 million in cash, yet only nets $500,000 (or less) in after-tax proceeds. The difference in the cash you keep has everything to do with the form of ownership and elective tax status, the nature of the transaction and the tax structuring that you and the buyer agree upon.
The Puget Sound region is home to many thousands of privately owned businesses that cover a wide range of industries including manufacturing, retail, distribution, professional services and just about everything in between. These businesses range in size from one owner with no employees to those with hundreds of employees.
One hundred percent of these businesses will experience a change of ownership. In the vast majority of cases, it will result in the owners receiving significant amounts of money as they transfer the earning power and good will of their businesses to others.
Because there is no centralized database that tracks all forms of transfers of privately owned business ownership interests, the annual rate of transitions of ownership can only be estimated. However, from prior research and from 23 years of experience in providing representation to those who sell their privately owned businesses, I estimate that between 6 percent and 7 percent of all privately owned businesses have ownership changes each and every year. This means that the average period of ownership is approximately 13 years.
In most cases, the owners will have spent years running their businesses on a day-to-day basis to generate both personal income and profits. Yet surprisingly few business owners have assembled the necessary plans for (a) when they elect to sell, or (b) how to be positioned to maximize their after-tax dollars when the time comes to transition the ownership of their businesses.
It is never too late to become informed about all aspects of how to unlock the hidden value of your business and convert it to cash when it's time to sell. In the above example of the sale of two different businesses, the tax savings are obvious. However, what is not obvious is a true understanding of the time-proven processes of getting buyers to pay you what your business is really worth. The process of profitably transitioning business ownership involves a series of steps that include the following:
- Understanding your personal objectives and financial needs
- Realistically determining the present value of your business
- Understanding what can and will influence its future value
- Determining the best market timing to move forward
- Correctly "packaging" your business
- Developing strategies to proceed with total confidentiality
- Knowing how to find the best possible buyers
- Financially qualifying buyers
- Entering into completely confidential negotiations
- Finding a lender for your buyer so you can get cashed out
- Reaching agreement on the negotiation of details
- Preparing appropriate legal documents in a time and cost-effective manner
- Coordinating prorationand closing needs
- Realistically assessing your post-closing obligations, such as training or transition consulting
- Closing the transaction
- Knowing how to best inform employees, customers, vendors and others after the transaction has closed.
In most cases, business owners go through the sale process only once and therefore cannot develop expertise through successive transactions. Whether you started your business with an original exit strategy in mind or are just beginning to develop one, the concepts are not difficult to either grasp or implement, and the effort can be very profitable.
PAUL KELLER and Acquisition Services Group in Bellevue specialize in assisting owners of privately owned businesses in selling their businesses. Reach him at 425-450-4800 or paul@asgpartners.com.
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