Skip to Content

Five critical steps for business owners approaching a sale

October 20, 2020 Article 8 min read
David Stahl Wealth Management
Selling your business is the culmination of a lifetime of work. It can be a stressful and emotionally charged undertaking that involves dozens of decisions affecting family, loyal staff, and you. To ensure the process runs smoothly, consider these five steps.
Man sitting at a desk, talking on a phone

Selling a closely held business is often one of the biggest events in a business owner’s life. The professional and personal impact is tremendous, and the process is complex, often involving careful coordination of wealth management, estate and charitable planning, tax, and business transition and investment banking experts to get the deal done. Despite the complexities, the sale can be successfully accomplished by dividing the process into five distinct steps.

1. Know your “why.”

The “why” behind the decision to sell — or consider an unsolicited offer — sets the foundation for the majority of the decisions you’ll make going forward.

Do you want to exit the business to retire? Are you looking for perspectives from outside investors as you embark on a new business phase or enter new markets? Are you considering transitioning the business to your employees via a sale? Perhaps the partners in the business have reached an unsolvable impasse in the direction of the company or a buyer is knocking with a price too good not to consider. This list goes on, but all of these potential scenarios lead to different considerations and conclusions the further you go in the process.

Knowing your “why” is critical to staying centered as you move from exploration and consideration to execution. When multiple owners and decision-makers are involved, this step becomes even more critical. In this instance, we recommend documenting the joint “why” for future reference. When faced with important decisions, it’s often in the midst of high-stakes negotiations. This is exactly when it can be easy — and the costliest — to forget why you’re negotiating in the first place. If your “why” is documented, you have an objective guide to help you re-center yourself and successfully negotiate.

2. Connect the sale to your personal financial picture.

We often hear clients say, “We’ll wait until after close to address that,” when considering questions around personal financial implications of the sale. These questions often involve:

  • Financial independence: The process of determining the amount of money needed after-tax to walk away comfortably
  • Estate planning/wealth transfer planning: Finding opportunities to reduce the family’s estate tax exposure
  • Cash management: Ensuring adequate resources are available post-close to cover the loss of health insurance and other benefits

From the perspective of a busy seller, it’s easy to understand why personal financial considerations are often put at the bottom of the pile. However, putting these discussions off can result in missed opportunities and potentially significant issues later in the process.

Knowing your “why” is critical to staying centered as you move from exploration and consideration to execution.

Ideally personal finances should be considered well before any transaction. The earlier you understand the implications of the transaction on your personal balance sheet, the more opportunities you’ll have before, during, and after to plan and the more confident you’ll be through the process. This can become even more important if the due diligence phase results in changes to what you plan on receiving. Having a documented set of personal financial objectives allows you to quickly recalibrate and confirm feasibility and desirability of those changes.

If the business has multiple owners, each owner will have their own set of personal financial objectives which may be at odds with other owners. While intricate details don’t need to be shared, a general understanding of each owner’s personal financial needs from the sale is key.

3. Know the “who.”

Once you’ve connected the “why” to your personal financial goals it’s time to determine the “who” — which type of buyer would best support your goals. In recent years buyers are often either a private equity fund looking for a great addition to its portfolio or a strategic buyer seeking to grow the enterprise through acquisitions.

Each type of buyer will be interested in your business for distinctly different reasons, and each will be involved in the business in different ways post-close. They’ll treat your staff differently, treat you differently, and define success differently as well. How these factors align with your values and business culture may determine which type of buyer you wish to pursue. There’s no wrong answer, but if you target buyers that align with your “why,” you’ll have a much higher probability of moving through the process successfully and achieving an outcome aligned with your goals.

4. Prepare for due diligence.

Once you’re clear on your “why” and the “who,” nondisclosure agreements will be signed, the buyer will start due diligence, and the negotiations will begin. No matter how friendly, comfortable, and aligned both parties seem to be during informal discussions once talks turn to the details be prepared for friction. This is even more prevalent in the current COVID-19 environment where potential buyers are focused on quality and applying additional scrutiny.

The earlier you understand the implications of the transaction on your personal balance sheet, the more opportunities you’ll have before, during, and after to plan.

One strategy to help manage the due diligence phase is to perform sell-side due diligence before the process begins. This entails hiring a firm with transaction experience to review your business and financials, identify areas of potential concern/exposure, and recommend ways to either rectify or present them to the buyer. The more thorough this engagement is the greater chance you have of reducing surprises when the buyer performs their own due diligence. It can also shorten the time due diligence takes if the buyer recognizes the work put into the sell-side process and the firm involved is respected in that area.

Beyond the above, your best chance of successfully navigating the due diligence phase is to use your “why” to stay centered during the inevitable stress. Avoid letting your emotions take over and resist making snap decisions under pressure from the buyer. Surround yourself with experienced professionals who will provide objective advice — they’ll give you a higher probability of a great outcome even if they’re not always telling you what you want to hear. Seasoned advisors have been through this process many times before and will have perspective you don’t; the cost of their advice can pay for itself many times over if you find the right team.

5. Understand your post-close outcomes.

A major post-close outcome is obviously the financial aspect. There’s a high likelihood that the initial offer and what comes after the due diligence phase will differ in terms of sale amount, structure, timing, etc. Anytime this changes the details ironed out in step 2 will help confirm feasibility. Can you afford to sell if you are paying ordinary income rates on an asset sale vs. capital gains rates on a stock sale? Are significant portions of the sale amount at risk, either through escrow holdbacks, high targets to achieve earnouts (which have gained prominence as buyers are more nervous about projected results in the current climate), or other such provisions? How much equity is the buyer requiring (or offering) you to roll into the new entity? If the request is feasible and accessible then discussions can proceed. If not, more work is needed.

Another post-close outcome is your ongoing involvement with the business and that of the other owners, if applicable. The expectations for your involvement need to align with your “why.” If you’re ready to retire but the buyer wants you involved for another five years, there’s a clear conflict. If all owners are critical to hitting goals that achieve earnouts, facilitate an open and honest conversation and recommit to the number of years you have to be involved. This can reduce the risk of fallout post-close, define the impact of new ownership groups, and minimize the stress of pulling the weight for others who aren’t contributing what they should during this time frame.

You should also consider the realities of working for someone else. This is heavily influenced by the “who” involved. You can be faced with anything from a hands-off, absentee owner who lets you run the business as usual to a hands-on owner who’s more inclined to approve every decision you make (or making their own decisions that you need to execute whether or not you agree). Your comfort level with this will have a direct correlation with your enjoyment of your day-to-day life post-close.

If you target buyers that align with your “why,” you’ll have a much higher probability of moving through the process successfully.

Finally, are the outcomes for your team members, customers, and suppliers in alignment with your goals? You’ll likely attribute some or all of your success to those supporting you and your company over the years. Therefore, it’s essential to understand the intentions of the buyer regarding treatment of your employees, your customers, your suppliers, etc. Very few business owners want to walk away at the expense of these parties. Sometimes avoiding that isn’t possible but understanding and accepting the plan here reduces any chance of regret after the fact. Special provisions can be included in negotiations where warranted. Chances are if you picked the right “who,” there will be a greater possibility of alignment. But if this is a priority, don’t save it until the end or wait for the buyer to address it. Be upfront and negotiate as necessary.

In summary

Selling your business can be a challenging and exhausting process but extremely rewarding when approached well. A key factor to help manage the stress of selling a business is putting in place a team of trusted business transition advisors with expertise in wealth management, estate and charitable planning services, investment banking, and tax. This team can help you create a timeline of what needs to be addressed and translate your business success into lasting personal financial success.

Selling your business is the financial realization of many years of significant effort. A successful marriage of the financial and the personal will enable an outcome that can fuel success in the next phase of your life. Ready to start? Give us a call.

Related Thinking

Woman standing by a brick wall on a tablet
August 18, 2020

Selling your business? Start with your personal finances

Article 7 min read
Middle aged man sitting in a chair on his deck.
September 4, 2020

Preparing your business for a sale: Five tips to get it right

Article 6 min read
Woman walking through airport
September 3, 2019

Four steps to a smooth, profitable exit from your business

Article 5 min read