Top 5 Things to Know Before Selling Your Business: An Outline

By Michael Mick McGirr | Phocus Law

While it’s not something we often discuss at AZREIA, many of your members own businesses, outside of just the entities where you hold your investment properties. In the life cycle of a business, the sale thereof is something that should be at least considered and for which some preparation is justified. With that in mind, I’ve prepared a quick “Top 5” list of some considerations as you may begin moving toward the sale of your business at some time in the future. Enjoy!

1. Understand your financials:

● Buyers take a deep dive into all of your financial statements(usually from the past 3-5 years). Be prepared to give them bank and credit card statements, balance sheets, income statements, and details about your customer base. They also look at any tax documents. Finding any irregularities or unexplainable mistakes can make or break your

deal. Make sure they are up to date!

● Adjust financials if you’ve been running personal expenses through your business OR be ready to explain the personal expenses as an adjustment to your business’ value.

● Understand your businesses worth to make sure you get a fair purchase price. (Consider the whole picture, including profitability, assets, and debt).

● Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) helps provide a clear picture of your company’s earnings and performance.

2. Get organized for diligence:

● What is diligence? It’s you disclosing almost every material element of your business for the buyer to be able to determine whether your business is worth purchasing.

● Review and confirm that your financials provide context. Giving buyers raw data leaves a lot of room for misinterpretation and confusion.

● Address any inefficiencies or operational issues and disclose key risks.

● Be prepared to provide contracts with employees, clients, or suppliers.

● Gather lease agreements if operating out of a rented space.

● Organize formation and governing documents.

● Be prepared to disclose any legal disputes.

● Organized and easily accessible documentation shows buyers professionalism and builds trust with potential buyers.

3. Plan for tax impact:

● The sale of a business through a stock or membership interest sale usually triggers a long-term capital gain for the seller.

● After taxes, the profit you earn from selling may be much less than you expect.

● The structure of the transaction has significant tax implications. Structure the Sale

Wisely (Asset vs. Stock Sale).

● Take Advantage of Capital Gains Tax Rates.

● Consider using an installment sale method.

● Take Advantage of Tax Deductions and Credits.

● Consider QSBS exclusions(stock sales) or charitable trusts to reduce your tax liability.

● Negotiate the sale price to reflect buyer’s tax benefits (asset sales).

4. Emotional readiness and timing:

● Feelings of attachment and loss are common and can negatively influence the sale.

Being emotionally prepared helps ensure rational decisions.

● Remind yourself why you are selling. You'll feel more positive about your decision to sell

if you focus on your motivations. Embrace change.

● Do your research on the process of selling. The more you educate yourself, the better

you can control your emotions and achieve your goal.

● Understand the motives of potential buyers.

● Try to sell during a peak in your business’s performance. You’ll get a higher price.

● Consider family impact. Discuss sale with family and plan for life after the sale.

● Depending on your industry, make sure current market trends are favorable before

selling your business.

5. Choose the right advisors:

● A good attorney will help you navigate the complexities of the sale agreement. They know what the buyers would like to see. They'll draft fair contracts and make the process efficient, including post sale conditions. Lawyers help to minimize liability.

● Surround yourself with an effective financial team: a capable accountant will help to minimize tax exposure through proper structuring advice, and a qualified and savvy financial planner will assist in making sure that the funds you receive from your business sale accomplish the financial goals you have for yourself.