If you are considering a future transition out of your business, it is critical to plan strategically years before engaging with potential buyers. Here are the important steps you can take to help ensure your transition will go as smoothly as possible.
 

Step 1: Assess the Marketplace
 

When evaluating the market, start with your own industry, then consider the broader economic climate. Think about what’s happening in the capital markets, consumer confidence and overall economic conditions—locally, nationally and globally— that could impact a future sale of your business.
 

Are your balance sheets improving? Is the valuation of your business rising? Evaluating both your company’s growth and broader industry trends—can help clarify the potential for future growth. 
 

Make an initial list of potential buyers to consider, including family members, managers, competitors, or other businesses you may want to approach for a merger. Another option to consider is an employee stock ownership plan (ESOP), which can help create a market for your shares and provide tax benefits.
 

Step 2: Assemble Your Team of Advisors
 

You may already have certain professionals in place to guide your business, such as a CPA, an insurance agent and a wealth manager. When preparing for a transition, it can also be invaluable to include an estate planning attorney and a business attorney as part of your team. It’s often helpful to designate one lead advisor to coordinate efforts and ensure the right experts are involved throughout the process.  
 

By assembling your team early, you can select knowledgeable professionals who you feel comfortable working with while allowing them time to get up to speed on your business, its history and its financial picture. 

While every member of the team is important, don’t underestimate the value of having competent tax professionals who can help structure the transaction in a tax-efficient manner. They will also be invaluable when reviewing proposals and letters of intent.
 

Step 3: Prepare Your Business
 

With your team in place, you’re ready to prepare your business to maximize its sale value. This includes a thorough review of fundamental metrics and important documents, a talent management assessment and an in-depth look at your business’s reputation. You’ll want to leverage your advisors’ expertise to handle these critical tasks.
 

Evaluate Your Business
 

Look for any potential issues that might delay or adversely affect your sale. Have your business and personal tax returns reviewed by a professional. Consider any state and local tax issues, as well as any “tax nexus” concerns if you do business in other states and countries. A sell-side quality-of-earnings report can improve transparency and help buyers feel confident in your financials. Confirm there are no liens or encumbrances affecting the company’s assets.
 

You should also evaluate your corporate structure as early as possible. If you are a limited-liability company (LLC) and are considering converting to a C-corporation to qualify for a Qualified Small Business Stock (QSBS) federal capital gain exclusion, consult with a professional on the benefits and drawbacks of this option.
 

Review and Organize Important Documents
 

Make sure your business’s financial records and corporate documents are accurate and up to date. Documents that may require review include state incorporation documentation, equity ownership records, minutes and other corporate formalities. Confirm whether any equity holders are entitled to rights of refusal or other rights that could affect a sale, and ensure key intellectual property is properly owned and registered. 
 

It is also important to review existing contracts for expiration dates and confirm that key relationships are covered. A sale may trigger any change-of-control or anti-assignment provisions in agreements with suppliers, licensers of intellectual property, lessors of capital equipment and, very often, lenders. In addition, employment contracts for senior management may contain provisions that trigger payouts or termination terms if the company is sold. Make sure all of this key information is stored securely and is easily accessible when needed.
 

Step 4: Obtain a Valuation
 

Work with a business broker to conduct an informal valuation of your business. Often, you can get an estimate or range of probable sale prices early in the process, which will give you time to make adjustments and address any issues.
 

When you are ready for a formal valuation, hiring a qualified, credentialed and experienced business appraiser is key.
 

Your tax and accounting professionals can also help confirm basis calculations, and work through any adjustments to your business’s earnings before interest, taxes, depreciation and amortization (commonly referred to as EBITDA) now rather than closer to the sale. 
 

Armed with the valuation and basis figures, you can determine a reasonable range for potential offers.
 

Step 5: Prepare Personal Financial Forecasts
 

Next, make sure that the figures you determined represent a reasonable range for potential offers and reflect the minimum amount for which you would sell your business, based on your cash flow and long-term needs.
 

Start by determining how much you need to support your lifestyle, anticipated spending, future goals and the legacy you hope to leave your family. These considerations will have a substantial impact on your bottom-line figure for the sale.
 

Look carefully at anticipated net-cash proceeds after debt payments and expected tax obligations. Too often, sellers focus only on gross proceeds during negotiations and overlook the impact of taxes and liabilities. To gain an accurate understanding of your lowest acceptable sale price, it is critical to engage your accountant to forecast the full range of taxes you and the company may incur.
 

Step 6: Advise and Prepare Your Family for the Transition
 

If you have family members involved in the business, communicate plans early to reduce the risk of misunderstanding or conflict later. Once you’ve shared your plans, maintain communication and keep your family involved as you make key decisions.
 

Consider whether it is appropriate to make family wealth transfers at this stage. Such transfers are often viewed solely as a tax-saving strategy, but they can also help prepare the family to become long-term stewards of wealth. If the business is staying with the family, consider transferring ownership interests to children and subsequent generations prior to the final transfer of management and control. The role of an estate planning attorney is essential in this process.
 

Step 7: Engage with Prospective Buyers
 

Once you have been deliberate about all the planning steps leading up to this point, you have the luxury of interviewing prospective buyers and entertaining bids based on more than just the offer price.
 

For many business owners, ensuring their employees will still have a job after the sale is critically important. You’ll also want to consider how a buyer may affect your business’s reputation in the future and whether you would like to maintain an ongoing role after the transition.
 

Beyond price, consider the buyer’s values, plans for employees and the long-term legacy of the business you’ve built.
 

All of these factors may influence your decision when evaluating buyers, in addition to who can meet your bottom-line sale figure.
 

Step 8: Structure the Transaction
 

Once you have identified a buyer, you’ll need to ensure the deal is structured in a manner that considers all potential tax and financial implications. Consider the following questions:
 

• Will the business’s form of organization change?
• Will the deal be a buyout or a reorganization?
• How will the payment be structured?
• Is a stock sale or an asset sale more desirable?
• Will you maintain an ongoing consulting role?
• Is there a need for non-compete agreements after the sale?
   

Remember that you’ve invested valuable time and effort into your business as well as planning for its transition. Stay committed to structuring a deal that achieves your goals and advances your best interest.