Financial Considerations Prior to Selling Your Business

Key Takeaways:

• Business owners wishing to sell their businesses have a host of personal financial planning issues to consider in advance of the sale.
• Defining the personal financial goals of you and your family is critical to determining your areas of need.
• Understanding your long-term cash flow needs and anticipated net worth will help identify the issues that should be analyzed and addressed.
• Reach out to your advisor to discuss the challenges you may be facing and how best to minimize risk of loss, putting your plan on track to success.

In recent years, increased values, inexpensive funding and an aging population have led many business owners to consider selling their companies. Although the lure of a big payday is attractive, the decision to sell is not always a simple one to make. For many business owners, their personal identity is often defined by their relationship with their company, and parting ways can be an emotional hurdle to overcome.

Once you decide when to sell your business, it is important to focus on your plan (if you have not already done so). Not only are there considerations related to the business itself, but there are also many personal considerations that require proper attention in advance.

These fall into four primary categories:

1. Defining personal goals.
2. Examining cash flow needs.
3. Addressing wealth transfer challenges.
4. Protecting and preserving assets.

By defining the personal financial goals that are important to you and your family, you can then begin to understand the issues that need to be addressed in order to accomplish those goals.

Define Personal Goals and Objectives

Personal planning often starts with asking yourself what you want. What are the things you would like to do after your business sells? What is important to you? What are your interests and curiosities? Are there specific goals you wish to achieve? Some owners retire after selling, but others continue working or reinvest the proceeds of their sale into a new venture. If you retire, will you focus on leisure activities (golf, boating, socializing, etc.), spend more time with family or possibly travel more frequently? All of these examples require some commitment of time and expense. How will your plans impact your financial outlook?

The answers to these questions will be different for everyone. Having an idea of your post-sale goals and objectives is critical to building a broader understanding of the financial impact of your decisions.

Examine Cash Flow Needs

For most business owners, a large percentage of their personal net worth is in the value of their company, and a significant portion of their income comes from it. It can be difficult to tell if the sale proceeds will be sufficient to support the owner’s lifestyle throughout retirement. Understanding these requirements starts with performing an assessment of current personal cash flow needs. Then, by incorporating anticipated changes and future expenses (based on forward-looking plans and goals), the overall future cash needs will come into focus.

This need-based exercise is valuable because it enables you to determine the minimum sale price required to support your lifestyle after the sale. Knowing the minimum sale price helps you determine whether to continue working, make different investment decisions or possibly make different business transition decisions.

Address Wealth Transfer Challenges

Having wealth affords people the freedom and flexibility to make certain choices about how they live their lives. At the same time, wealth comes with both predictable and unpredictable challenges. One area where complications come into focus is planning for the transfer of wealth to future generations. Many factors, including the types of assets you own, the value of your estate, charitable intentions, potential tax liability, and family dynamics play important roles in identifying the best strategies to efficiently transfer assets.

Every business owner has a different set of complexities. Do you have an estate plan? When was the last time you reviewed your estate plan? Did your family look the same then? Are your assets larger or more complex than they were then? Does your estate plan adequately address your potential estate tax liability? Are the people you named in your documents the right choices to administer your assets? Estate planning in advance of large changes can help reduce potential complications, conflict and cost.

Other complicating factors highlight the need for sound estate planning. Common examples are second marriages, blended families, minor children, special needs beneficiaries, outdated documents and having no natural heirs. For people with wealth, these complexities are only exacerbated, and the need for sound estate planning becomes crucial.

Protect and Preserve Your Assets

 When the business is sold, the selling owner’s liquid assets will likely increase significantly. Having a plan in place to protect those assets from risk is an important step in preserving long-term viability. While some assets carry varying levels of protection from creditors based on state or federal law, there are steps you can take to help protect assets from market risk, unnecessary costs, and creditors and predators:

1. Reviewing the Titling of Your Assets 

Title refers to the legal ownership of the asset. The way an asset is titled can affect:

• Who gets the property upon death of the owner.
• Whether probate is necessary.
• The amount of estate tax liability.
• The amount of fees during estate administration and income tax ramifications of certain transfers.

2. Consider Protecting Yourself and Your Estate Against Risk of Financial Loss

Typically, this involves obtaining insurance that will pay you or someone else if certain events happen that generate losses. Although many business owners have insurance through their company, it may cease or change when a sale occurs. In general, there are five primary categories of personal insurance to consider:

• Life
• Disability
• Health
• Long-term care
• Liability insurance

Each type of insurance is designed to protect the owner from a specific type of risk. Discuss these risks with your advisor to determine if insurance is an efficient way for you to guard against loss and preserve your assets.

3. Ensure the Asset Allocation of Your Investments is Consistent With the Amount of Market Risk You are Comfortable Taking

Exposing your assets to too much or too little of one asset class could cause significant variability in your returns or losses. The right mix of stocks, bonds, alternatives and cash investments should match your long-term needs and objectives. Of course, your personal needs and willingness to assume risk will likely change over time. Working with an Investment Strategist will help keep the asset allocation of your portfolio consistent with your goals and comfort level.

4. Those Concerned About Ongoing Risk of Liability and Creditors Might Consider Certain Trust Vehicles to Own Assets
In general, if a trust is revocable, or the creator of the trust can control what happens to the assets, that trust would provide very limited asset protection, if any. On the other hand, irrevocable trusts, where the creator of the trust foregoes control or use of the assets, can potentially provide asset protection.

Irrevocable trusts can also help guard against beneficiaries’ divorcing spouses, bankruptcy trustees, lawsuit creditors and even nursing home claims in some states. In addition, many states now have laws allowing people to create Domestic Asset Protection Trusts (DAPTs). These are irrevocable trusts designed for a person to put his or her own assets in the trust and have some type of access to those trusts while avoiding many types of creditor claims, assuming all the rules and laws are followed. The use of asset protection trusts is a highly specialized area and must be considered only after fully understanding the details.

In summary, business owners have a host of financial planning issues to consider and address prior to selling their business. By defining the personal financial goals that are important to you and your family, you can then begin to understand the issues that need to be addressed in order to accomplish those goals. Whether that means putting your cash flow needs in perspective, addressing an insufficient estate plan or taking steps to reduce your risk of financial loss, this process starts with a conversation with your advisor who can help guide you through these important issues.