Owners who have spent much of their life building a business may have a difficult time envisioning what comes after they sell their company. Of course, there are plenty of action steps and issues that the owner should consider undertaking well in advance of considering the sale in order to realize the dream of a successful exit. In prior posts, we discussed the “traditional” action steps and issues such as preparing their company for sale in advance, financial planning, determining the value of the business, and accounting preparation (for starters). These opportunities all focus on maximizing the sale value and the likelihood that the sale process will be successful.
But what about preparing themselves, management and family members for the eventual sale? These represent other opportunities that are worthy of consideration prior to undertaking a sale process and concurrent with the traditional action steps mentioned above. Addressing these matters well before the owner becomes involved in a sale process will enable the owner to address them rationally and calmly and develop a coherent plan, rather than rushing to make decisions because they have decided to undertake a sale process or a sale is pending. We consider these to be critical pre-sale planning opportunities that are often not discussed until the opportunity has passed. As such, we often find ourselves talking with clients about these additional considerations prior to launching a sale process to ensure that they have thought about these matters carefully and understand how they fit into the overall context of the sale process and their overall sale objectives.
Here are six pre-sale planning opportunities business owners should consider well in advance of selling their company:
Make charitable contributions: Does the owner want to donate company stock to their alma mater, a religious organization, or another type of charity that accepts appreciated non-marketable securities? If so, it is important for owners to keep in mind that there is a nuanced timing angle with regard to donating appreciated securities in order to receive the most favorable tax treatment. Charitable giving requires careful planning in advance of a sale so that the owner, in consultation with their tax advisor, makes the donation at the optimal time to maximize the tax benefits.
Undertake estate planning: Essentially, this is the inverse of charitable giving from a timing perspective. If the owner is contemplating gifting company stock to their children, the owner should gift such shares as far in advance of a sale as possible in order to minimize the valuation and minimize the perception that the shares are being gifted at the sale value. At the very latest, the gifts should be made prior to executing a letter of intent since, notwithstanding the sale process, the success of the sale process remains speculative at best. Of course, owners seek to gift company shares at the lowest possible value to maximize the associated tax benefits. This creates two advantages: first, the owner utilizes their lifetime gift limit per the IRS as efficiently as possible, and second, the recipients will typically be in a lower tax bracket when their shares are liquidated. As noted above, this requires planning in advance of a sale so the owner can gift discounted shares to their children while the sale outcome remains uncertain.
Put incentive plans in place for key management/diffuse any management buyout issues: If the owner is older, it is no secret that they may be considering a liquidity event in the near future. As such, key management may be asking about the owner’s future plans anyway. Thus, the owner can proactively establish an incentive plan so that management will enthusiastically support the sale process if/when that time arrives. If it is likely that certain members of the management would not be retained in a transaction, the plan can also include a golden parachute for those members. Putting management incentives in place when there is no deal pending removes the emotion from the discussion and enables the owner to rationally and calmly create a plan without the pressure of a looming transaction. In addition, owners can use this opportunity to diffuse the management buyout chatter for a team that cannot afford to acquire the company. Again, not having the pressure of a transaction allows the owner to diffuse these issues in a calm way while maintaining their management team as the management team will eventually be integral to helping the owner execute the sale process.
Take the call and accumulate buyer inquiries: We have written previously about the buyer calls owners receive — sometimes on a weekly basis — regarding their plans/interest in selling their company. It may now be in the owner’s best interests to take these calls, even if they have no intention of selling their company for a few years. They can use these calls for their benefit to do some recon and “take the market’s pulse.” Owners can also use these calls as an excellent opportunity to educate themselves about the sale process and potential buyers, even if a sale is not imminent.
Have conversations with family members about sale plans: Owners should take the time to discuss with family members that they are thinking about exiting the business, particularly if there are family members who work at the company. It is important for owners to have those conversations early on to set expectations and to ensure that family members have a clear understanding of how a sale may impact them (regardless of whether family members are employed by the company). These may be difficult conversations to have, but they are necessary to ensure that family members understand the owner’s thoughts about a sale and that everyone is on the same page if and when the sale process commences.
Consider how the owner will spend their time post sale: Before undertaking a sale process, owners should consider what they will do with their time once they have sold their company. Is it time to pursue another venture? Do they want to continue working for the company in a different capacity? Do they want to retire? Travel? Spend more time with family? An owner’s decisions about how they will spend their time post-sale is an important aspect of pre-sale planning and may be the difference between a successful or busted sale process. More than one business owner got “cold feet” at the eleventh hour since they had not considered how they would spend their new found time once the sale of their company closed.
All of these are important considerations for a business owner to think about prior to embarking on a sale process. Perhaps just as important as preparing the company for sale is for the owner to prepare themselves, their family and their management team for a future transaction as well. The best time to think through these issues and have these conversations is when there is no sale pending, so that owners and their constituents can discuss them rationally and without emotion and arrive at solutions that are fair for all involved. Ultimately, this will help the owner accomplish their objectives for the sale when that time arrives.
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