Use exit strategy during, after sale

Too often, business sellers might have been able to secure more for their business if they had operated it a little bit differently.

They might also have been able to reap greater after-the-sale rewards if the deal had also been structured differently. Recently, I wrote about the first step which is to prepare the business for sale from an operational point of view.

Beyond the operational strategies, the second step an owner needs to consider is what happens during and after the sale.

There are issues associated with the actual transition, key personnel, contracts, taxes, estate planning, etc., which can impact the current value of the business, its chances for continued success and the seller’s net rewards.

During the transition, there will need to be plans put in motion to minimize the seller's role in the day-to-day operations of the business. In most cases, it will need to be done quietly. In other cases, there might be value in broadcasting the news.

Planning on how and when key personnel are notified of the change of ownership can be crucial. If the seller has built a strong management team, the transition of ownership and knowledge it should be seamless.

An effective exit plan will also include diversity in both customers and vendors, complete with contracts. This should minimize the risk and maximize the opportunities for the new owner.

The type of entity a company can have a significant impact on the tax consequences a seller will face. The tax implications on a C-Corporation can be quite different than an S-Corporation, which will be different than if they were a limited liability company, which might be different than if it was a sole proprietor.

This can impact the attractiveness of the business in the eyes of a buyer. For example, since most buyers prefer to purchase a business through an asset sale, if the deal needs to be structured as a stock sale for the seller, there might be a gap between the expectations of both parties.

If planned for, there may be some financial steps that can be taken prior to the sale and/or some steps that can be taken with how the deal is structured to minimize the tax consequences for the seller.

Either way, it is important for both parties to understand these ramifications before showing up at the close of escrow. For business sellers with family members or an estate to consider, there can be myriad issues that need to be examined.

An integral part of any seller's exit plan is their personal financial plan for after the sale. Does the sale of the business satisfy the needs the seller faces during the next 10, 20 or more years?

Often, a substantial amount of a seller's net worth is tied to the business, so ideally, they will have planned and benefited from tax advantaged retirement programs. With so many issues to consider, sadly it is estimated that 70% of business owners do not have an exit strategy.