With billion-dollar mergers and acquisitions continuing to dominate the headlines, family and small business owners may be asking themselves if they should also consider selling.  

Whether or not a sale makes sense, the economic recovery that has fueled the growth of many businesses suggests that it’s a good time for business owners to re-examine the value of their business and to revisit — or put in place — a succession plan which may or may not include the prospect of a sale.  

Selling a family enterprise is a huge decision that touches every part of the business owner’s life. A sale will mean a full reworking of your financial situation, from cash flow and tax issues, to leaving a financial legacy to succeeding generations — which requires careful planning. Ideally, it’s a process that begins as early as a few years ahead of time, and it’s worth doing even if a sale is not in your immediate future, since opportunities can arise quickly and vanish just as fast.

Among the issues to consider in this process are:

• How has the valuation of your enterprise changed in the current environment?  Are companies similar to yours being acquired?  If so, how are they being valued?
• Has your succession plan kept pace with the growth of your company?  Does your designated successor have the ability to manage a potentially larger enterprise?
• Are you prepared financially for a sale?  Understanding wealth transfer strategies can assist you in completing a smooth and tax-efficient transfer, while helping achieve desired succession planning goals.

As a first step, you should consider talking over a planned sale with your financial advisor. If a specialist in business advisory services is available, you can benefit from their expertise in helping select investment bankers to handle the transaction, and bringing in legal and tax advisers to craft an appropriate plan.

Knowing how the gain from your sale will be categorized is important.  Long-term gains can trigger a federal tax rate of 23.8 percent, and California state taxes will also be involved  This may be higher, or lower, than your regular income-tax rate. Creating a plan in advance to calculate anticipated taxes based on projected gains is ideal. You should also determine if any estimated tax payments are required, along with the timing of any year-end payments.

Selling a family enterprise may also require some changes to your estate plan. At the time of your death, any remaining proceeds from the sale of the business are included in your estate.  With a federal estate-tax rate of up to 40 percent, it is important to review your estate plan to make any necessary modifications.

Executing the sale on an installment basis can allow you to delay reporting part of the gain and potentially reduce your current tax liability. This will work only if you are confident that the buyer will be able to keep making the payments over the agreed-upon time frame.

As you prepare for a sale, you should consider cutting back on financial items that aren’t directly related to operating expenses, just as you would clear out a house going on the market of all but its essential furnishings. Pare back insurance, company-owned vehicles and expense accounts that aren’t essential to operations. This makes it easier to present a clear and accurate picture to prospective buyers.

We think you should take yourself out of the sales process as much as possible. If you rely on a small number of key customers or accounts, it may be your relationship that supports these revenue streams. That can also highlight potential vulnerabilities to interested buyers. Look over all your customer contracts, vendor relationships, and other arrangements that could have an impact on a possible sale.  

Do a detailed review of your financials. Check with an accountant and decide how thorough a review you’ll need. You can also have a CPA compile your financial statements, but this may not be enough scrutiny for a prospective purchaser. A more in-depth review would require the accountant to offer an opinion of your company’s financial status and note that their work did not raise any outstanding issues.

Having a certified accountant complete a thorough audit is the best way to make sure your financials are in line with generally accepted accounting practices —GAAP. While extra costs may be involved, this will give prospective buyers the best assurance of your company’s financial health.

As the current wave of mergers and acquisitions continues to surge, it’s easy to let your emotions get the better of you as you think of the potentially rising value of your company.  It’s worth keeping in mind that for most families, the opportunity to sell a business only comes around once in a lifetime.  Preparation and planning are key to helping ensure the sale is completed appropriately and you receive your desired outcome.  

Investment products are: not a deposit, not FDIC insured, may lose value, not bank-guaranteed, not insured by any federal government agency.