Selling Smart: Tips and Insights for Selling Your Business Part 2: Executing the Plan

September 14, 2023

_{Andrew Sherry and Jillian Staruk review a customers' plan.}

_{By Dave Bennett, Senior Vice President, Regional Community Business Banking Manager, and Kathleen Maroney, Senior Vice President, Manager of Government Assisted Lending, Middlesex Savings Bank}

In the first installment of this series, we covered four considerations for selling a business, including who should be on the core team: an accountant, an attorney, a financial advisor, and often a broker. In this post we’ll discuss what business owners can expect during the actual transaction. As in the previous post, while these posts are not intended to supplant guidance from your fiduciary advisors, we hope it will offer some general direction as you plan for this important financial event.

You’ve built a business as a sole or secondary owner, you’ve decided it’s time to sell, you’ve gathered advice from your team, you’ve signed over the business to an eager new buyer, and you move into the next chapter of your life.

If only it were that easy.

Once you decide on a buyer for your business, there are still a lot more decisions to be made. For example:

Should you continue to own (and rent out) the building that houses your business, or should you sell it?
Should you walk away from the business after the sale or stay on as a consultant for a certain period of time to help to bridge customer relationships to the new owner? Might the advisory role even become a requirement of the sale?
What might the picture of your life look like going forward, and how realistic is it?

The answers to these questions all play into the kind of future you create for yourself. Yet even during the process of executing the sales plan, business owners often run into other issues that surprise them.

Expecting the unexpected
Especially if you’re a first-time business seller, several items about the transaction tend to be eye-opening. To avoid potential pitfalls, here are a few to be aware of.

You may need a third-party business valuation. If a lender is involved with the buyer, they are likely to require a business valuation be done by a third party. If the Small Business Administration (SBA) is involved, this valuation is virtually guaranteed to happen. That’s a primary reason why it makes sense to build up a clean balance sheet and strong income statement for at least three years and start planning well in advance.
It can take longer than expected. Contracts can go back and forth between buyer and seller for months before a final agreement is reached. Loan approvals take time. In some cases, if the buyer is set to become the key employee of the purchased company, and a lender is involved, the lender may require the buyer to obtain key person insurance, a form of life insurance. This may add to the timeline.
Buyers must show considerable financial stability. There can be a big difference between someone who voices interest in purchasing a business and a buyer that a lender would be willing to finance. The buyer is subject to personal credit history checks and other financial screening, which may reveal that they don’t have sufficient financial strength to keep the business afloat if something goes wrong. The amount of experience a business owner has in the industry may also be a consideration for loan approval. Or they may not be able to come up with the 20% down payment that is typically required to purchase a business.
Many associated costs are higher than in residential sales. An appraisal for a house is typically in the range of $200-$400, in addition to manageable closing fees. When you consider commercial lending, however, costs can add up quickly. If the business includes real estate, a real estate appraisal can cost $2,500-$5,000 or more, and an environmental survey may be required. Attorney fees are also higher than in residential purchases. Buyers should have their team put together a list of all the fees or consult a source like SCORE, SBDC, or CWE for more information on estimating the total project cost for the sale.
You may have to settle for a lower price. Even when it’s based on a fair and detailed appraisal, the price of a business is always up for negotiation. That is why an attorney with mergers and acquisition experience is particularly useful.

In the end, if you are prepared, talk to your advisors and get experienced coaching, you will be in the best possible position when the right buyer comes along. There is a higher probability of the transition process going smoothly. Not to mention faster. This is where advance planning and having the right team of advisors around you is as important for a seller as it is for a buyer.

In the final installment of this series, we’ll look at considerations that need to be made for the proceeds from the sale of the business.

Disclosures

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. If you are considering rolling over money from an employer-sponsored plan, such as a 401(k) or 403(b), you may have the option of leaving the money in your current employer-sponsored plan or moving it into a new employer-sponsored plan. Benefits of leaving money in an employer-sponsored plan may include access to lower-cost institutional class shares; access to investment planning tools and other educational materials; the potential for penalty-free withdrawals starting at age 55; broader protection from creditors and legal judgments; and the ability to postpone required minimum distributions beyond age 72, under certain circumstances. If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. Your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and there may be account transfer, opening, and/or closing fees associated with a rollover. This list of considerations is not exhaustive. Your decision whether or not to roll over your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.

by Middlesex Savings Bank