Many business owners overlook the importance of planning their exit strategy until it’s too late. As a result, they make rushed and often suboptimal decisions during and after their exit, despite the fact that selling their business is usually the most significant transaction of their lives and often their only source of retirement savings.
What they fail to realize is that effective business exit planning should start years in advance. Without proper planning, they miss out on opportunities to enhance growth, protect value, mitigate taxes, and secure their family’s future.
To ensure a well-executed exit and a prosperous future, their strategy should start early, be meticulously planned, and focus on key areas to truly maximize the business’s value. Here are four powerful approaches to help seize this monumental opportunity and maximize the business’s sale price.
Create a Strong Valuation Case
Most entrepreneurs have an unrealistic idea of how much their company is worth. Some have a formal valuation, but it does not reflect what their business is actually worth in the eyes of the buyer.
In general, the value of a company is determined by EBITA (earnings before interest, taxes, depreciation, and amortization) and then a valuation multiplier is applied. This multiplier is based on a range of values specific to the industry. The specifics of the company determine where it falls within that range. Factors such as effective management, client concentration, operational stability, systems processes and databases, product and marketing strategies, owner readiness, and much more. This is what the buyer really cares about.
By addressing key areas of concern, the business will become more appealing to potential buyers. A well-prepared and managed business not only reduces perceived risks but also results in more favourable deal terms, a smoother transition process, and significantly increases its sale price.
Take the time to thoroughly evaluate the business—every business has its imperfections. With some effort, entrepreneurs can elevate their business to a higher multiplier value.
From the buyer’s perspective, a business that can show healthy cash flow, that’s well maintained and enjoying sustained growth, is much more attractive.
Build an Elite Team of Collaborators
Business owners generally have an accountant and lawyer as part of their core professional team. However, these professionals often lack experience in the intricacies of exiting a business and rarely (if ever) sit together in the same room to cohesively work on an exit strategy.
To master the intricacies of selling a business, it’s essential to assemble a powerhouse team of professionals skilled in exit planning. Meticulously coordinating personal, legal, tax, and business considerations throughout the process is vital. Business owners require a cohesive group of experts—exit planners, financial advisors, estate and M&A lawyers, CPAs, and investment bankers—working together seamlessly. Additionally, enlisting the support of fractional CFOs, COOs, CMOs, and other key roles can significantly enhance the value of the business.
Without a unified team, business owners’ risk fragmented advice and missed opportunities for tax mitigation, wealth preservation, and maximizing business value. Disjointed guidance can lead to a lack of a cohesive strategy. However, when exit planning professionals work together seamlessly, they unlock potential opportunities and skilfully sidestep pitfalls. By meticulously coordinating critical personal, legal, tax, and business considerations, a cohesive team ensures a successful and profitable exit. The game-changing impact of having such a unified team cannot be overstated.
Unlock tax savings with Pre-sale Planning
There are far more tax mitigation opportunities available before the sale of a business than after the deal is completed. There is a treasure trove of tax-saving opportunities just waiting to be discovered before the sale of a business. The potential for mitigating taxes diminishes significantly once the deal is sealed, so proactive planning is the golden ticket to higher after-tax proceeds.
Early planning allows for the employment of various strategies tailored to unique circumstances, such as restructuring the business to optimize tax benefits, purifying assets to qualify for the Lifetime Capital Gains Exemption (LCGE), and gifting shares to family members or charitable organizations for tax deductions.
Additionally, implementing estate freezes can help lock in the current value of the business, transferring future growth to the next generation and minimizing capital gains tax upon sale. Setting up trusts can provide income splitting opportunities and protect assets, while strategically structuring the sale can maximize tax efficiency.
As the adage goes, “It’s not what is earned but what is kept after taxes.” By delving into these tax mitigation strategies, the financial outcome of the sale can be dramatically enhanced, securing a prosperous future for the business. Early planning isn’t just about navigating tax complexities; it’s about seizing opportunities, providing more wiggle room in negotiations, and ultimately, keeping more of what has been worked so hard to build.
Personal Financial planning is your guide
Most people move through their financial lives unknowingly wearing a blindfold. The personal financial plan removes the blindfold by revealing their current financial trajectory and guiding families in making informed financial decisions for the future.
The foundation of a financial plan is highly customized, incorporating the entrepreneur’s financial goals, post-sale cash flow needs, tax status, asset allocation, insurance, and other income streams. Furthermore, the planning process compels entrepreneurs to articulate their desired future. Using this framework, you can model and contemplate different sale scenarios, including those related to cash flow and initial net sale proceeds, as you determine how much rollover equity to retain after the transaction. Additionally, the financial plan can help identify tax mitigation opportunities.
A financial plan is critical for everyone, but it is arguably more important for an entrepreneur in the exit planning process. By quantifying the net proceeds needed from a sale and understanding your wealth surplus, the financial advisor will help the entrepreneur maximize sale potential and protect the family legacy by employing a coordinated approach to wealth management, tax optimization, estate planning, and asset protection.
