Most business owners do not understand the complexity involved in exiting a business.Whether they are selling, merging, or succeeding their business the transaction has emotional, financial and timing elements to address. At any point in time an owner can pull the trigger, run a fire sale, accept a lower fee or pay a bigger tax burden. That’s easy and often too frequent of an occurrence if disaster strikes or if the economy is weak at the time they take their business to market. The goal should be to maximize the profitability of the sale and minimize the post-tax impact of the transaction.
The dot.com era is a great example of how not to conduct a transition. In the dot.com era times of “any high tech/internet business will flourish thinking” people were selling unproven concepts because buyers were tossing cash around and investing in anything that moved. Businesses brought to market then were more likely to sell at a premium. In today’s weaker economy, even a solid, proven and profitable business might see a decline in the selling price because a business is only worth what the buyer will pay for it. When the pool of sellers outweighs the pool of buyers, prices drop. That’s true economics.
Planning an exit strategy years in advance provides the seller several benefits:
- Profit enhancement. It gives ownership several years to improve the profit margins on the books, which will spike the sales price.
- Owner distancing. A drawback to a great business is one in which the owner pushes all the buttons. To make a business more attractive, buyers need to feel the operations will easily transition without the owner’s continued involvement.
- Ready to strike at any time. By addressing these first two items, the owner is given the flexibility to go to market with more speed if they see conditions changing.
- Be prepared in the event of a disaster. We do not like to sell on fear, but people get sick and personal needs change. Businesses that encounter these kinds of problems and are not in an adequate position for a more immediate sale will most likely suffer and will not receive market value or higher.
The ability to transfer ownership over time. This might have a bigger impact in an ESOP or family succession transition. Gifting strategies may be used to transition entity gains, which can reduce the debt for an incoming family member and minimize the taxable gain on the transaction.
