money compass

A Road Map for Selling a Closely Held Business: Part 1

In this first installment, we lay out core issues, such as timing, family dynamics and assembling a team.

According to a recent UBS survey, 41 percent of closely held business owners expect to exit their businesses in the next five years. Many are baby boomers who are at or beyond traditional retirement age. Other business owners who aren’t necessarily looking to retire believe that current economic conditions will boost their chances of selling at a favorable price. 

This means that over the next five years, millions of closely held businesses will potentially be sold in the United States. As advisors, we have an obligation to help our clients through the process of selling their businesses. Often, the process of selling a business is unknown to the business owner. This leaves her vulnerable to making significant mistakes.

Here’s part 1 of a road map for helping clients to facilitate the sale of a closely held business.

Timing of the Sale

Getting the timing right when selling a business can have a significant impact on the sales price. Where we are in the business cycle really matters. If your client sold her business in 2006, when multiples were high, she could have gotten a high sales price. Fast-forward a few years to 2009 or 2010, and if your client could even find a buyer, the prices being paid were among the lowest in years. Recently, the mergers and acquisitions industry has seen a great deal of activity, and multiples are as high or higher than they’ve ever been. Corporations and private equity firms have almost unprecedented amounts of cash on hand to make acquisitions. This seems like a good time to sell a well-positioned, closely held business.

Family Dynamics

Overcoming family dynamic issues in the sale of a family business is crucial for a successful result. Because the identity of the family is often tied to the family business, a sale can represent the loss of status and heritage for family members. Sometimes, the business is the glue that keeps the family together. As such, you should first make a comprehensive analysis of the alternatives to sale. Are there potential family members who could step into the shoes of current family management? If not, could professional management be brought in to avoid a sale? If appropriate succession planning isn’t possible, consideration of a sale should become the primary objective. Transparency and proper communication among relevant family members are crucial to maintaining trust after the sale. If family dynamic issues are properly dealt with and the transaction is handled in a way sensitive to the needs and feelings of family members, a sale may be the best solution and actually improve family relations over time.

Putting Together the Team

Closely held business owners aren’t always experienced in choosing the best outside advisors. They tend to rely heavily on one or two, typically a CPA and, perhaps, a lawyer. With the sale of the business, the business owner will need to expand the advisor team to obtain the best result. She may also need to change advisors, if existing ones aren’t up to the task. Some of the advisors most often required for the sale of a business include:

  1. CPA. The CPA is a key outside trusted advisor to the closely held business owner. She typically has regular contact with the business and understands its structure and operations well. This individual can prove invaluable at every stage of the sale of a closely held business, especially in making sure that the sale is done in the most efficient manner from an income tax perspective.
  2. Attorneys. Typically, a closely held business owner will need two attorneys with different specialties: a corporate attorney to help structure and execute the transaction and an estate-planning attorney to set up the trusts and related vehicles to mitigate gift and estate taxes. Typically, estate planning is most tax effective when done well in advance of the corporate transaction. Unfortunately, more often than not, estate planning is an afterthought, and the estate-planning attorney is brought in at the last minute before the sale closes. Significant tax-planning opportunities are often lost in those situations.
  3. Investment banker. Although a closely held business owner has typically worked with accountants and attorneys in the past, it’s unlikely that she’s worked with an investment banker. Yet, for larger family businesses, choosing the right investment banker can be critical to maximizing the sales price. Investment bankers specialize in the purchase and sale of businesses. Finding an investment banker who specializes in the closely held business owner’s industry can be crucial to determining a proper value, identifying potential buyers and working with the corporate attorney to negotiate the terms of the sale.
  4. Qualified appraiser. While the investment banker helps value the business for sale, gifts to family members, charity or irrevocable trusts require a qualified appraiser for tax purposes. Qualified appraisers value the business for gifting purposes, taking into account any valuation discounts that are available on the transfers. By minimizing the value of the gift, the appraiser can magnify the estate tax savings.
  5. Financial advisor. Perhaps the most important outside advisor is the financial advisor. Closely held business owners tend to invest most of their capital back into the business and, typically, don’t have large investment accounts. As such, they may not be sophisticated users of wealth management services. If the business owner wants to sell the business, this lack of sophistication needs to change. A good financial advisor can help with the presale financial planning necessary to answer the question of whether the business owner will receive enough from the sale, after taxes, to support the owner’s and her family’s lifestyle.

With the team in place, in part 2, we’ll continue our road map, tackling issues, types of potential buyers, the value of gifting before and after the sale, and the importance of income tax planning.

This is an adapted version of the authors’ original article in the March 2019 issue of Trusts & Estates.

This article is provided for informational and educational purposes only. The views and the opinions expressed in this article are those of the authors and do not necessarily represent or reflect the views of UBS Financial Services Inc. or its affiliates.

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