Prepare for the Sale of a Business in 6 Steps

To potentially maximize the value of a deal and protect your assets, put a strategic plan in place before any papers are signed.

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By Mary Martuscelli

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Often, a lucrative business opportunity comes along but doesn't work out because the business owner hasn't adequately prepared by building a sales strategy, creating a tax plan, streamlining finances and making provisions for the partners or family members involved.

Selling a business can create a unique liquidity event and have a substantial impact on taxes, cash flow, wealth-transfer plans and an owner's lifestyle.

To help you potentially maximize the value of a sales deal and keep your assets protected, put a strategic plan in place before any paperwork is signed.

Business owners should consider their time frame for selling the business as well as the market.

Have a succession plan at least three years in advance to give you time to get your business in order and be ready for opportunities that arise.

Consider taking the following steps to prepare for the sale of your business:

Related: 5 Things Business Owners Should Keep in Mind With Succession Planning

1. Build a sales strategy with a wealth advisor.

Advisors who specialize in this area can help you maximize the financial and emotional value of the business. Specialists can help you define a strategy in alignment with your family's goals and objectives.

Plus, a well-chosen advisor can help you assemble the right team to sell your business. An unbiased advisor can guide you throughout the process, from interviewing investment bankers to bringing together all the legal, tax and business experts.

2. Create a tax plan.

Selling a business can have a huge impact on your taxes. If the gain on the sale is long term, a federal tax rate of as much as 23.8 percent could be applied. Additional state income taxes, where applicable, may also be imposed on the gain. Doing tax planning before selling might help in maximizing deductions and avoiding penalties.

Work with a tax advisor before completing the sale to establish your income expectations for the year, calculate anticipated taxes based on projected gains and determine if any estimated tax payments are required along as well as year-end payments.

Remember that the value received from your business will also be included in your estate after your death. Federal estate tax rates of as much as 40 percent may apply. Some states collect additional estate or inheritance taxes.

3. Consider selling the firm over time.

To offset the tax impact, consider selling the business on an installment basis. This involves collecting payments over several years, allowing you to recognize gains over time and potentially avoid higher tax brackets.

This is most effective if you are confident the buyer will be able to meet his or her future payment obligations.

4. Clean up the financials.

Before talking to buyers, eliminate financial items not directly related to operating expenses. This can include insurance or salaries for nonworking family members, as well as cars, expense accounts and other discretionary expenses.

If it's not something the buyer would want to pay for, it shouldn't be there.

Related: The Key to Maximizing Return When Selling a Business

5. Review the financials with an accountant.

You can conducat one the following financial reviews with an account:

A compilation, the least formal type of assessment, involves a certified public accountant's preparing financial statements based on information provided by the business owner. The CPA won't offer any opinions on the data and will assume everything is accurate. A compilation is useful for evaluating internal goals but doesn't provide the validation a buyer will want.

A review involves a more in-depth analysis of the financial statements. The CPA provides an opinion of the company's financial status and identifies potential issues. The review provides "limited assurance" that nothing serious came to the accountant's attention.

The most formal assessment is an audit, when a CPA conducts a critical review of the company's management and an independent verification of financial information. An audit provides the highest level of assurance that the financials are in line with generally accepted accounting practices. This might be the best option for owners preparing to sell a business.

6. Diversify your customer base.

As part of the business-review process, examine all your vendor contracts, customer contracts, license agreements, buy and sell agreements and other arrangements that might affect a sale.

You want to know if any of your current business terms will hurt or increase value for the buyer. Look for red flags, such as a significant portion of sales going to one or two customers. This could be considered risky for a buyer, especially if the customers have strong personal relationships with the owner.

Thinking about what you can do to make yourself less relevant to the sales process may help you get the best deal for your business.

U.S. Bank and its representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. Individuals should consult their tax and/or legal advisor for advice and information concerning their particular situation.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events, a guarantee of future results, or investment advice.

Related: Cut Through the Complexity of Selling Your Company

Mary Martuscelli

West Region President of The Private Client Reserve of U.S. Bank

Mary Martuscelli is the West region president of The Private Client Reserve of U.S. Bank. In her role, she is responsible for managing all aspects of The Private Client Reserve in Washington, Oregon, California, Arizona, Nevada, Utah and Colorado.

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