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Preparing to sell your business: Have a plan in place for when the time comes

By Ian Perry and Roman Basi

April 17, 2023

Small business owners listen up. Do you know what happens to your business if something were to unexpectedly happen to you? If you answered, “I don’t know,” then you are one of many business owners with this response. Most business owners have no form of succession planning in place. Without a good succession plan, your family or other heirs might be forced to sell the company under duress and be shortchanged on the value of the business you’ve built. If there’s no clear plan in place for who is in charge of the company, your business might end up directionless and at risk for failure.

When succession planning, there are several different steps you should take in order to set up your business to succeed after your departure. For those who are looking to sell, these steps are crucial. Some of those steps include preparing financials, valuing the business, looking at tax implications and picking a strong representation team.

First, you should prepare your financials. This would include profit and loss statements (P&L), cash flow statements, balance sheets (BS) and tax returns. The P&L statements show the results of the operating activities of your business. Having these prepared gives any buyers a good idea of your company’s ability to generate profits. It is crucial that these financials are re-casted and consist of any addbacks. When preparing the balance sheet, it is important to keep everything current in order to determine the working capital in the company. Be sure to make it clear whether you are on the cash method or accrual method for both financials and tax returns.

Next, you should have your business valued. Having a valuation that is properly prepared and comprehensive can be critical if you were to sell your business. The main purpose of a valuation is to provide you with a fair-market value for your business. A business valuation should:

  • Include an investigation of historical facts and projections of future activities.
  • Consider past sales of similar companies.
  • Be based upon independent and objective standards.
  • Comply with professional standards in the valuation industry and U.S. Internal Revenue Code.

Along with this, a good business valuation should include several different methodologies for privately held companies such as the:

  • Earnings Capitalization Approach.
  • Underlying Assets Plus Goodwill Approach.
  • The Free Cash Flow/Leverage Debt Approach.
  • The Market Approach.

Once the company is properly valued, you should then look into the tax aspects of the sale. This can be done with a Tax Minimization Analysis™ (TMA). The goal of a TMA is to understand the after-tax net cash perspective. This will show you what you will walk away with when the succession plan is completed. This is typically a working document that will evolve as a deal progresses.

Any TMA that is well prepared will consider:

  • Structure of the deal.
  • Any offered equity pieces.
  • Employment and consulting agreements.
  • Earn-out.
  • Purchase price adjustments.
  • Working capital adjustments.
  • Professional fees.
  • Federal/state/local taxes.
  • Closing cost.

After you receive a valuation of your business along with a TMA, find someone to assist you in facilitating the sale of your business. It is very important to retain legal counsel to represent you during the selling process. There are several benefits in doing so, such as:

  • Reviewing the first drafts of the Letter of Intent (LOI).
  • Advice regarding the best way to structure the deal (stock sale or asset sale).
  • Overseeing due diligence.
  • Negotiating terms of the deal.
  • Reviewing the definitive purchase agreement.
  • Completing schedules and closing deliverables.
  • Balancing out conflicting interests between you and a broker.
  • Representing you in any post-closing legal matters that may arise.

Along with having strong legal representation, working with a group of accountants/CPAs offer you many advantages as well. For example, they will be able to provide the valuation and TMA as well as help to avoid any common mistakes that may trigger audits. Accountants/CPAs also will be there to ensure that the post-closing tax returns are filed in accordance with how the deal was structured.

While working with a group of professionals is a must in succession planning to sell your business, brokers often are hired by business owners to help facilitate the deal. Brokers have great benefits such as lining up potential buyers and working to reduce professional fees within the deal. However, some broker fees can become expensive and their interests may conflict with yours.

Along with having strong legal representation, working with a group of accountants/CPAs offers you many advantages as well.

Finally, it’s time to prepare yourself and your team for the selling process. You would first want to obtain a LOI, which is a signed binding agreement between a buyer and seller. Intentions to enter negotiations are laid out and first-time essential terms are established that will carry over into the purchase agreement. Once the LOI is signed, the due diligence process begins. During this period, the buyer usually requests documents such as financials, legal documents, administrative documents and any other documents that will give them a complete picture of your company. It is important you have your team represent you during this process and narrow some of the buyer’s requests. Once the due diligence is completed and the buyers are pleased, you will move onto the purchase agreements. This binding, legal document governs the sale of your business. These should be thoroughly reviewed by your team to determine the fairness/unfairness of the terms. This document should reflect how the deal is structured, so it is critical that it is properly drafted.

For business owners, it may be difficult to let go of a business that you built on hard work and determination. Unfortunately, we cannot live forever and must have a succession plan in place for your business to be in good hands when the time comes.

Roman Basi, an attorney/CPA and president of The Center for Financial, Legal and Tax Planning, Marion, Ill., presented the education session, “Preparing to Sell Your Business,” at The ARA Show™ 2023 in Orlando. Ian Perry is a staff accountant for The Center for Financial, Legal and Tax Planning. For more information, visit or call 618-997-3436.