Northwestern Mutual Guest Column — Key Considerations for Selling Your Business

When it comes to your business, understanding how much it is worth can be challenging and involves answering many different questions. Do you plan on selling your business any time soon? If so, who are you planning on selling it to? Whether it’s an employee, family member or strategic buyer, with 2023 right around the corner, now is the time to consider developing a financial preparedness plan for business succession planning.

READ — Exit Planning: New Study Shows Most Colorado Business Owners Are Not Ready to Sell Their Businesses

Value Your Business

The day-to-day challenges of running a business often impede our ability to understand its value and formulate a game plan around getting the outcome we desire. Not only do I encounter this with clients as a wealth management advisor for the Colorado Northwestern Mutual office, but as a business owner myself looking to sell down the road, I have a front-row seat to the same set of challenges.

Rather than basing how much your business is worth on a recent sale of a similar enterprise, or performing a Google search of earnings before interest, taxes, depreciation and amortization (EBITDA) multiples in your industry, consider scheduling an independent valuation with a professional to help you understand where value is attributed. It can be both surprising and enlightening to find out what the outside market values most, or least, about your business.

Once you have a valuation, you have a benchmark to drive and clearly understand future growth, and can spend time performing in those areas that enhance value. Furthermore, when the valuation is updated each year, you receive quantifiable feedback about the changes you are making in the business.

Develop a Financial Plan

Selling your business at the price you desired and finding out later you must unexpectedly return to work due to the market environment, taxes or unforeseen health changes is not ideal.

“Reverse engineering” what your future lifestyle and estate plan requires is the first step, and you can achieve this by working with a certified professional to create a comprehensive financial plan. Some of the considerations for a successful financial plan include:

1. Tax implications

This should address current tax issues, tax that is related to the business sale and tax implications during retirement and upon passing.

2. Asset management

Do not mistake an investment portfolio for a financial plan. How your assets are allocated now, how they will be allocated post-sale, where assets are located (taxable or non-taxable account) and what performance is needed to allow your plan to work are all common themes surrounding asset management.

3. Risk management

In the event of a disability or premature death, where will the money come from to execute on your buy-sell agreement with your partners? Was your life insurance structured as an asset or established for a finite period of time to cover death? Do you have a plan for long-term care during retirement? Protecting your current ability to run the business along with weighing your future desires are all important considerations.

READ — How to Avoid Risk While Running your Business

4. Estate planning

When the financial plan reveals that you will be unable to spend all of your wealth, would it make sense to gift shares of the company to children or future grandchildren before the explosive growth of the share value? There is so much to address on this front that having a plan that works in concert with an estate attorney is essential.

Tax Considerations

Is your business structure today the most tax-efficient for current income and a future exit? Do you have a business structure that will award you the best tax outcome when you plan on eventually selling your business?

In addition to engaging your planner, consider hiring a law firm with knowledge of the tax and estate planning front to work alongside your CPA to determine the best strategy.

Build a Team Around You

In addition to building a management team to help run your business, you should also invest in a comprehensive financial planning team. Now is the time to take a fresh look at what advisors are on your team, who is needed and who needs to be replaced.

In addition to a CPA, a valuation expert and an attorney who can bring business organization, estate planning and tax knowledge to the table, a CERTIFIED FINANCIAL PLANNER™ professional or CFP® will make sure the outcome you desire is never out of focus when tax strategy, business organization, estate planning and differences in opinion surface.

Exiting the business that you started and/or ran for years is complex and emotional. The earlier you begin the methodical process of building a trusted team around you and creating a financial plan, the higher likelihood of receiving the true value of what your hard work has built.

Royce Zimmerman is the wealth management advisor for Northwestern Mutual.