Baby boomers are nearing retirement, and that's translating into an increasing number of entrepreneurs considering a full, or partial, exit from their family business.
A number of transition options may be available, such as a gradual succession to the next generation or sale to a third party. This decision is never easy. Entrepreneurs must assess the talents and interests of family members in continuing the business and weigh them against the benefits of the immediate monetization of the investment. Family businesses don't always change hands from one generation to the next.
The business isn't always compatible with the family structure, and as a result many owners choose to sell to a third party.
In those situations, a well-thought-out exit strategy can significantly improve the chances of successfully closing the transaction and maximizing cash in hand.
Here are three key things to consider when building your ideal exit strategy.
Managing expectations on the valuation gap
Most entrepreneurs have an emotional attachment to their business, as well as an idea of what it's worth. That valuation, however, doesn't always mirror what a third party is willing to pay.
Obtaining a good valuation analysis is not only the key to successful purchase price negotiations, but also a crucial part of pre-sale recapitalizations/reorganizations that may ultimately affect the tax payable once the transaction is completed.
Depending on the nature of your business, a variety of relevant valuation methodologies may be used (such as market multiples, discounted cash flow or asset value).
Engaging the right help early in the process will help you understand the business' true value, help with purchase price negotiations and achieve greater value on exit.
Seller due diligence
Enhancing cash in hand when selling all or part of a business requires a good understanding of where the value of the business lies and what the potential risks may be to a buyer. Consider the ideal buyer for the business: is it a strategic acquirer, a private equity fund or perhaps even the company's current management team?
The answer will often depend on personal fit, long-term goals for the business and the extent to which you may wish to remain involved in the business post-sale.
An optimal way to achieve the desired value in a sale transaction is to take a hard look at your business through the eyes of the ideal buyer and objectively assess and address all areas of risk that a third party might use to drive down the purchase price. This could include streamlining operations to focus on core competencies and increase operational efficiencies, optimizing cash flow and assessing working capital needs.
Not only will this help to avoid surprises that could prolong the deal process, but it will also highlight opportunities to increase business value and mitigate potential transaction risks.
Tax minimization
Tax planning in advance of a transaction can help reduce the costs of a deal, improve returns and manage risks. Good tax planning can have a direct, and significant, impact on after-tax sale proceeds.
A comprehensive approach to tax minimization may also be advantageous for buyers, as it can often bridge the gap between the seller's expectations and needs and the purchaser's tax-effective divestment.
In the family business context, a key component of planning is integration with the family's overall estate plan. Consider the use of a family trust to maximize income-splitting opportunities, and ensure that the wills of all shareholders are up to date. Pick a tax planning strategy that minimizes tax exposure while still remaining attractive to potential purchasers.
Traditionally, the seller prefers to sell shares while buyers prefer to acquire assets. To address this, one option to consider is a "hybrid" transaction, in which both shares and assets are sold.
Understanding the tax that results from the deal is vital in achieving greater family wealth. Getting good tax advice early on will facilitate a smooth transaction for both sellers and purchasers, and the savings obtained will far outweigh the costs incurred. •
