Proper preparation before selling a business is essential for a successful transition. Whether you plan to sell your company outright or transition it to another party, there are many legalities that should be addressed during exit planning to protect yourself and your business’s future.
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In a webinar organized by PBO Advisory Group, a panel of exit planning experts from Kinected Advisors, Merrill, and Procopio shared insights on what business owners should do before transitioning a business to ensure a smooth shift. Here are the four key takeaways:
- Ownership Restructuring: Reduce your ownership stake with proper estate planning, including strategies such as setting up trusts for family members. By doing this, you minimize the risk of losing significant control over your shares post-sale. Large companies often structure deals where sellers retain a portion of their ownership but must revest a portion of their shares over several years. By reducing your ownership stake ahead of time, you give the buyer less leverage and protect more of your assets.
- Establish an Employment Agreement: As a business owner, you’re used to managing your own compensation through distributions and other financial mechanisms. However, once your business is sold, you may find yourself working for the buyer. To protect your interests, it’s essential to negotiate an employment agreement before the sale. This agreement should cover your salary, benefits, and severance in case the new owner decides to terminate your role. Many sellers overlook this step, only to realize later that they are working under unfavorable terms. Having this agreement in place beforehand can save you a significant amount of money and provide security post-sale.
- Organize Your Documents in a Data Room: By organizing all your key business documents in a data room, you are set up for a streamlined due diligence process and sale. Additionally, by reviewing these documents ahead of time, you can ensure there are no gaps or issues that might arise during negotiations. A well-prepared data room not only speeds up the sale process but also presents your business as more professional and organized, which can increase buyer confidence.
- Conduct an Audit: Although it’s not always feasible, getting an audit before selling your business can be incredibly beneficial. Buyers typically refer to Generally Accepted Accounting Principles (GAAP), and many private businesses are not fully GAAP-compliant. An audit helps identify discrepancies and prepares you for any financial surprises that could arise during negotiations. Moreover, it lends credibility to your financials, making the buyer more confident in the transaction. This extra layer of transparency can make a significant difference in whether the deal closes successfully.
Preparing your business for sale involves more than just putting it on the market. By reducing your ownership stake, negotiating an employment agreement, organizing your documents, and conducting an audit, you can set yourself up for a smoother and more successful sale. These steps not only protect your interests but also increase buyer confidence, making it more likely that the deal will close on favorable terms — especially yours.
Questions about taking any of these steps? Contact us!
Francesca San Diego
CEO & Member
[email protected]
(858) 935-4846
