Selling or exiting a business is a complex process that requires careful planning and preparation. Whether you're looking to retire, pursue other interests, or simply cash out, make your business transaction-ready to help increase your proceeds, reduce your risks, and plan for taking care of your family and employees post-transaction.
In this article, we'll explore what transaction readiness means, why it's important, and how you can prepare your business for a successful sale or other transition.
What is transaction readiness?
Transaction readiness is the process of preparing your business for sale or exit. It generally occurs one to three years pre-transaction and involves a comprehensive assessment of your business' operational, financial, legal, tax, and strategic readiness so it’s efficiently structured, attractive to potential buyers, and can withstand the due diligence process.
Transaction readiness involves both quantitative and qualitative assessments and often involves engaging various professionals, such as attorneys, accountants, investment bankers, valuation experts, and transaction advisory services.
Why is transaction readiness important?
Transaction readiness can significantly impact the sale price of your business. Buyers are willing to pay a premium for businesses that are well-prepared, have strong financials, and can demonstrate a clear growth trajectory.
Transaction readiness can help you reduce risks associated with the sale process. By addressing potential issues early, you can mitigate the risk of deal-breaking surprises during due diligence, including previously unidentified tax liabilities, disputes, or operational weaknesses.
It can also help you achieve your personal non-financial goals, such as preserving your legacy, safeguarding continuity for your employees, or supporting philanthropic causes.
How to prepare your business for a successful sale
Preparing your business for a successful sale requires careful planning and execution. Here are key considerations to keep in mind.
Identify your motivation
Before embarking on the sale or exit process, clearly identify your reasons for exiting. Understanding your goals and objectives can help you shape the sale process and achieve your desired outcomes.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Discuss personal financial goals
For most business owners, their net worth is intimately tied to the value of their business, so it's important to align your personal financial goals and needs post-transaction with your anticipated value. Discussing these goals with a financial advisor or wealth management professional can help you develop a thoughtful plan to reduce tax burden and achieve your personal goals.
Develop a timeline
Selling a business can take time — often many months, or even years. Developing a realistic timeline can help you manage expectations, align stakeholders, and give you enough time to prepare your business for the sale.
Building a personal and business planning timeline before you’re ready to sell can help you get the most out of your transition. When determining your timeline, adjust your approach from a tax perspective so you can receive the full after-tax value for your company.
Generally, the closer the transaction is to closing, the more likely planning opportunities will narrow — that means it’s important to make a detailed plan long before beginning the sale. The below graphic demonstrates one example of an effective timeline, as it pertains to personal goals and business goals.
Personal and business goals timeline
Engage professional advisors
Selling a business is a complex process that requires specialized expertise. Engaging professional advisors, such as attorneys, accountants, investment bankers, and valuation experts can help you navigate the sale process, identify potential issues, and help increase your ultimate value.
Consider non-financial factors
Selling a business isn’t always just about the financial reward. Non-financial factors, such as your legacy, family, employees, philanthropy, lifestyle, or other personal goals, can also play a significant role in the sale process.
Determine your deal structure
Whether you’re transitioning to family, selling 100% of your business, or forming an employee stock ownership plan (ESOP), there are many ways to transition your business.
Prior to engaging in discussions with a buyer, have answers to the following questions to help you determine the best transaction structure for achieving your goals:
Am I looking for a cash deal from the transaction, or am I willing and able to take stock in the buyer?
Post close, which business aspects am I able to manage and control, and which do I want to manage and control?
What risks am I willing to take related to the buyer’s ability to execute a strategic plan?
Does a stock sale, asset sale, or 338H10 election work better for me on an after-tax basis?
Are there compliance or approval factors I should be aware of?
After determining the answers to these questions, you’ll have a better idea of your transaction priorities and your deal approach — including which portions of the transaction you’re willing to be flexible with, and which portions are imperative to meeting your personal and professional objectives.
Business plan
Your business plan should align with both personal and professional business goals. To meet these goals, consider identifying the following.
Strategic business decisions. Determine the decisions you can make today to help you meet your business' growth objectives for the future.
Future opportunities for growth. Most buyers will want to know about potential business opportunities and how you and your management team plan to pursue them.
Your growth strategy. Being able to articulate your strategy and have a well-prepared pro forma adjusted financial model will help get buyers excited about partnering with, or acquiring, your organization.
Understand your business financials
Financial information is a critical component of any sale process. It's important to have a clear understanding of your company's financial information, including detailed revenue, gross profit, profitability, and other industry specific metrics. This information can help you set a realistic valuation for your business and provide potential buyers with the information they need to make informed decisions.
Identify business value drivers
Business value drivers are key performance indicators (KPIs) that influence valuations in your industry. It's important to understand these value drivers and develop a program to monitor and track them. This can help advisors work with you to identify areas where you can improve your business' value and make it more attractive to potential buyers.
Develop a succession plan
Selling a business can be disruptive to your employees and customers. Developing a business succession plan can help protect continuity and reduce the impact of the sale. Identify who will run your company should you exit and that they are prepared to do so.
Prepare information
Buyers will require access to financial and operational information during due diligence you may not be accustomed to preparing. Additionally, they will require access to detailed tax records that may or may not have been prepared with a transaction in mind. Producing the type of information necessary in a transaction is vital to building buyer confidence and increasing value.
Market-based valuation
In a competitive market, understanding the market value of your business can help you objectively evaluate your transition options. A market-based valuation of your business may also allow you to identify and address the key issues or risk areas of your business and help you protect its value.
Understand potential after-tax cash proceeds
Understanding the potential after-tax cash proceeds of a sale can help you make informed decisions about your sale process. Engaging an M&A tax CPA or attorney can help you understand the tax implications of your sale and develop a tax-efficient transaction structure that leaves you with the after-tax value you expect.
A good advisor will also consider estate planning and gifting strategies to help increase your after-tax value.
