The Right Time to Begin Planning for Selling a Business
- Anatoly Iofe
- Sep 5, 2024
- 8 min read
The decision to sell a business is one of the most significant moments in the life of a founder. Unfortunately, too many business owners delay planning for this critical event, or fail to plan altogether. An estimated 75% of business owners do little or no planning for what could be the most important transaction of their careers. This lack of preparation can lead to missed opportunities, financial losses, and a failure to secure the legacy one might have envisioned.
The reality is that planning for the sale of a business should begin long before the actual transaction takes place. This article explores the various stages of planning, both before and after the sale, and provides a comprehensive guide to help business owners navigate the complex process of selling their business. Special attention is given to post-sale wealth management, the benefits and responsibilities that come with new wealth, the current lifetime exclusion, and the potential consequences of the 2026 sunset of tax provisions.
Pre-transaction planning
Establish a vision
The first step in preparing for the sale of a business is to establish a clear vision. As a business owner, you need to ask yourself early on: "How, when, and why do I want to transition or sell my business, and to whom?" Your answers to these questions will shape the entire planning process.
For example, are you seeking liquidity? Do you want to remain involved in the business after the transition, or are you looking to step away completely? Are you open to selling to a private equity firm, who might only hold the business for 3-5 years, or are you more interested in a longer term capital from a family office, that could invest for a decade or more?
If you plan to keep the business in the family, it’s crucial to assess whether the next generation is ready and willing to take over. This requires open communication and a realistic evaluation of their capabilities and interests.
Establishing a vision years in advance of any transition allows you to align your objectives with the right buyers and ensures that the sale or transition meets your personal and professional goals. It’s a process that requires careful thought and planning, but one that will pay off in the long run.
Plan for the unexpected
Even the most well-thought-out plans can be derailed by unexpected events. Illness, sudden death, or an unexpected offer to buy your business can all have significant impacts on your plans. Therefore, it’s essential to be prepared for the unexpected.
Having contingency plans in place for various scenarios is a critical component of any business exit strategy. These plans should include clear instructions on who will take over the business in the event of your absence, how decisions will be made, and what steps need to be taken if an unexpected offer arises.
By planning for the unexpected, you can ensure that your business and your legacy are protected, no matter what happens. It’s about being proactive rather than reactive, which can make all the difference when faced with unforeseen circumstances.
Look at your industry broadly and what the future will likely bring
In today’s rapidly changing business environment, it’s not enough to focus solely on your company. You need to take a broader view of your industry and anticipate future trends and disruptions. Technological advancements like artificial intelligence, the Internet of Things, and other innovations can significantly impact your business's viability and value.
If you plan to continue operating your business for another 15 or 20 years, it’s essential to assess whether you have the resources and energy to adapt to these changes. On the other hand, if your business is thriving due to these disruptions, it might be the perfect time to sell while valuations are high.
This strategic approach ensures that you’re not making decisions in a vacuum. By considering external factors and industry trends, you can make informed choices about when and how to sell your business, maximizing its value and securing your financial future.
Develop a succession plan
If an outright sale isn’t your goal, and you hope to transition your business to a family member, or a new leader from outside the organization, a documented succession plan is essential. A succession plan provides a clear roadmap for how the business will be managed in your absence and who will take over the leadership.
This plan should include detailed instructions on the roles and responsibilities of the successor, as well as any training or development needed to prepare them for their new role.
A well-thought-out succession plan not only provides peace of mind, but also ensures the continuity of your business, even in your absence. It’s an investment in the future of your company and your legacy.
Build a strong advisory board
A strong advisory board can be an invaluable asset during the planning and execution of a business sale or transition. An advisory board comprised of experienced leaders in your industry can provide strategic guidance, offer insights into market trends, and help you make informed decisions.
Whether acting as fiduciaries or non-fiduciaries, these advisors can play a critical role in shaping the long-term vision for your business and ensuring that it aligns with your personal and professional goals. They can also step in to make decisions on your behalf if needed, providing an additional layer of security and confidence.
By surrounding yourself with trusted advisors, you’re not only enhancing your decision-making process but also increasing the likelihood of a successful business transition.
Don’t go it alone
The process of selling, or transitioning a business is immensely complex, with numerous financial, legal, and operational considerations. It’s not something you should attempt to figure out on your own. Instead, assemble a team of experienced advisors, including investment bankers, tax accountants, estate planning attorneys, family office experts, and investment professionals.
The earlier you put together your team, the more flexibility you’ll have when the time comes to sell or transition your business. These professionals can help you navigate the complexities of the transaction, optimize the sale price, and ensure that your financial and personal goals are met.
Engage your family throughout the process
When a business is a family affair, it’s essential to involve your family in the planning process. Open communication is key to ensuring that everyone understands the future of the business, and their role in it. This is particularly important if your goal is to have a child or children take over the business one day.
Engaging your family early on in the process allows you to gauge their interest and readiness to take on the responsibilities of running the business. It also provides an opportunity to address any concerns or challenges that may arise.
By involving your family, you’re not only preparing them for the future but also ensuring that the transition is smooth and successful. There should be no surprises when the time comes to hand over the reins.
Post-Transaction Planning
Redefine your sense of purpose
The sale of a business marks the end of one chapter, and the beginning of another. For many business owners, this transition can be challenging, especially when their identity and sense of purpose have been closely tied to their role as a business owner.
It’s essential to redefine your sense of purpose and find new ways to channel your energy and passion. Whether it’s launching a new business, setting up a family foundation, or engaging in philanthropy, finding what’s meaningful for you will help you transition smoothly into your post-business life.
Too often, business owners don’t think about this until after the sale, which can lead to feelings of emptiness and dissatisfaction. By planning for this transition early on, you can ensure that your post-business life is fulfilling and aligned with your values and goals.
Update your financial plans
The sale of a business often results in a significant influx of wealth, which requires careful management and planning. Your existing financial plans, estate planning documents, and investment portfolios may no longer be adequate to address your new financial situation.
Engaging with financial professionals who specialize in post-business financial planning is crucial. They can help you update your financial plans, optimize your investment strategy, and ensure that your wealth is managed in a way that aligns with your goals and values.
Proper financial planning can also help you navigate the complexities of tax laws, including the current lifetime exclusion, which allows individuals to transfer a substantial amount of wealth without incurring gift or estate taxes. However, this exclusion is set to decrease significantly after the 2026 sunset of the current tax provisions, potentially exposing your estate to higher taxes.
By planning ahead, you can take advantage of the current exclusion and implement strategies to minimize your tax liability after 2026. This proactive approach ensures that your wealth is preserved and passed onto future generations in the most efficient way possible.
Establish a vision for your newfound wealth
Beyond updating your financial plans, it’s important to establish a clear vision for your newfound wealth. This involves thinking through what you want your wealth to accomplish, and what you don’t want it to accomplish. For example, what kind of lifestyle do you want to live? What kind of lifestyle do you want your children and other family members to live? What is a good use of wealth, and what is unhealthy?
By putting parameters and guidelines around your wealth, you can ensure that it is used in a way that aligns with your values and goals. Communicating these desires clearly to your loved ones is also important to avoid misunderstandings and ensure that your wealth is managed according to your wishes.
The current lifetime exclusion and the 2026 sunset
The current lifetime exclusion allows individuals to transfer up to $13.61 million (as of 2024) in assets without incurring federal estate or gift taxes. For married couples, this amount is doubled ($27.22 million), providing significant opportunities for wealth transfer and estate planning.
However, this exclusion is set to decrease significantly after January 2026, when the provisions of the Tax Cuts and Jobs Act (TCJA) are scheduled to sunset. If no new legislation is passed, the exclusion could drop to approximately $6 million per individual, effectively reducing the amount of wealth that can be transferred tax-free by more than half.
The potential consequences of this change are significant. For high-net-worth individuals, the decrease in the exclusion could result in a substantial increase in estate taxes, which could erode the value of their estate and reduce the amount passed on to heirs.
To mitigate these potential consequences, it’s important to take action now. Strategies such as gifting assets to family members, setting up trusts, and leveraging the current exclusion before it decreases can help minimize your tax liability and preserve your wealth for future generations.
Conclusion
The right time to begin planning for the sale of your business is sooner than you think. Whether you’re just starting to think about your exit strategy, or you’re ready to begin the process, the steps outlined in this article provide a comprehensive guide to help you navigate the complexities of selling a business.
From establishing a vision and planning for the unexpected, to updating your financial plans and preparing for the 2026 sunset of the current lifetime exclusion, careful planning is essential to ensuring a successful business transition and preserving your legacy.
Remember, the sale of your business is not the end of the journey but the beginning of a new chapter. By planning ahead and making informed decisions, you can secure your financial future and enjoy the benefits and responsibilities of your newfound wealth.
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Sources*:
*These organizations are not affiliated with IFG. IFG does not endorse, support, or recommend any information that is not provided by its affiliates or representatives.
Disclaimer:
Information provided is for informational purposes only, and does not constitute an offer or solicitation to sell, a solicitation of an offer to buy, any security or any other product or service. Accordingly, this document does not constitute investment advice or counsel or solicitation for investment in any security. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
