Exiting your business will be a pivotal wealth event for you and your family, and you may only get one opportunity to do it right.
As you embark upon the sale process, it is important to fully evaluate yourexit alternatives, implement a robust succession plan for your management team, and create a wealth plan for how you will invest and distribute yourwealth post-exit.
Receiving an unsolicited offer or seeing peers selling their businesses can tempt entrepreneurs into selling their business without proper planning. Before diving into a transaction, however, it is critical to evaluate the spectrum of available alternatives for generating liquidity from your business, such as a full sale, selling a minority stake, going public, selling to your management team (a management buyout) or selling to your employees through an employee stock options program (ESOP).
To best evaluate your options, we work with clients to develop a comparative grid that weighs the benefits of each alternative across a variety of factors, including:
Timing considerations
Ability to retain an interest in the business post-exit
Estimated transaction proceeds
Impact of the transaction on employees
Level of involvement in the business post-exit
Individual and corporate tax implications
One of the most important value drivers for buyers of private businesses is a strong senior management team with a well-defined succession plan for key roles within the company. Additionally, building out a robust succession plan will give you peace of mind that your company will be in good hands and help support future upside potential to the extent you retain an ownership interest in the business post-exit.
Important aspects of a comprehensive succession plan that we have seen successful entrepreneurs implement include:
Setting up a strong board of directors, including several independent directors
Creating ownership incentives for key employees (e.g., stock options, phantom stock, etc.)
Adopting formal employment policies for hiring, compensating and promoting senior roles
Developing a leadership transition plan for senior management
Implementing guidelines for identifying and grooming successors for leadership positions
Hiring an executive coach to help develop senior talent
Create a contingency plan in the event of the death or disability of key management before the succession plan is fully implemented
Source: Northern Trust 2021 Business OwnerBenchmark Survey
It is all too common for entrepreneurs to get wrapped up in the chaos of getting the deal closed and overlooking important things that need to be done post-exit.
We find it helpful to create a 12-month post-exit checklist that catalogs steps that need to happen either immediately, in the first few months or within a year after closing. For example:
Create a family communication plan to get your family on the same page about what to say and what not to say (e.g., on social media) if asked about the transaction.
Implement a short-term cash management strategy and 24-month waterfall for deploying cash proceeds to cover anticipated liabilities and tax payments related to the transaction.
Reassess any personal and cyber security needs as your wealth profile changes.
Review insurance coverage and any corporate benefits that may no longer be available after the business is sold.
Review estate and investment plans at key junctures.
Close out any remaining deal items.
Understandably, entrepreneurs are committed to securing the highest possible sale price for the business they built. However, it can be valuable to take a step back and utilize goals-based planning to determine the minimum sale amount needed to confidently fund your lifetime goals, which may include everything from paying for college to creating a venture fund to starting a new business.
Once you have identified your minimum viable sale price, any proceeds you receive above that can be set aside as a separate pool of funds for opportunities down the road, moved out of your estate for the benefit of your heirs, or “given back” to the buyer during the deal process in exchange for other favorable deal terms.
Other deal considerations to establish pre-exit include:
What percentage of your business you would like to own post-exit and how much of that stake, if any, should be transferred out of your estate
Tax strategies to maximize transaction proceeds, including donating proceeds to charity or reinvesting them in “opportunity zone” real estate to defer capital gains
Additional sources of capital that may be needed beyond the sale proceeds in order to fund certain larger goals, such as starting a new business
Strategies for investing the sale proceeds and offsetting the risk of holding a concentrated position in a private business
