Business Transitions

What Three Financial Actions Can Make Selling Your Business Easier

    • werner-lynne-headshot.jpg
    • Lynne Werner

      Sr. Director, Business Owner Advisory Services
      Feb 15 2023

What Three Financial Actions Can Make Selling Your Business Easier

Author: Lynne Werner, J.D., Senior Director, Business Owner Advisory Services

Whether you plan to someday leave your business to family or sell to internal or external parties, a successful transition is largely dependent on how you plan ahead. Because business owners are busy, it can be easy to wait until you are ready to exit before creating a transition plan. By then, you may have missed opportunities to take actions that make it easier to transition to family, find a buyer, and receive a fair price or ensure a revenue stream into retirement.

Here are three actions business owners should do today to help ensure a successful transition.

Action #1: Keep Personal Expenses Separate from Your Business

Today’s accounting software makes it easy to connect your bank accounts and automatically import transactions. Tools like these are great time savers, but what happens if your accounts also include personal expenses?

Unless you’re diligent in cleaning up and categorizing all items listed on your ledger, you could end up with unpleasant tax implications, like an audit. When thinking about deductions, be sure you can justify expenses according to IRS rules and regulations.

It can be easy to blur the lines between business and pleasure. For instance, if you take a trip to Orlando to meet with a client, it’s probably reasonable to deduct a day or two spent at a hotel. However, the IRS isn’t as likely to accept your family’s stay at an all-inclusive resort as a legitimate business expense, even if you do conduct business during the trip.

If you’re tempted to forego the previous advice and deduct your personal expenses to reduce taxable income, it’s better to err on the side of not making this deduction.

While it’s important to minimize your business’ tax burden, too many deductions may have implications beyond taxation when it comes time to sell. This applies to even legitimate business expenses. It’s always a good idea to review your expenses with your accountant each year to minimize your tax implications without creating cash flow confusion for future owners.

 Action #2: Understand Your Company Value

It’s important to understand the value of your business before you want to sell, so you have time to adjust your plans, if necessary, to meet your goals.

According to a recent survey, 32% of company owners don’t know how to determine the value of their business, and it’s easy to understand why. Establishing a business’ value for a sale requires the skills of qualified experts who are familiar with the industry, your specialty area and appropriate IRS guidelines. It is also difficult to find comparable transactions without the help of someone with access to these details. Hiring a professional can usually be done for $15,000 or less, so it’s often worth the cost and effort to make sure it is done correctly.

When working with a professional, be sure to explain your goals. For instance, if you plan to sell your business at a discount to a family member, your valuation should reflect that intent. Alternatively, if you’re selling to an outside buyer, your valuation should reflect the maximum sale amount.

Action #3: Structure the Sale to Produce the Desired Outcome

When it comes to selling or transitioning a business, most owners are looking to generate a long-term income stream, and that requires long-term planning. This is often a moment where owners convert a highly liquid asset that they have considerable control over into something that results in the loss of control.

Before thinking about transition, make sure you know your goals and what you will need to finance your future. In addition to financial terms, this will require considerable self-reflection and evaluating non-financial objectives, such as family continuity, employee impact and length of your transition.

Business owners should start consulting with their advisors at least three to five years ahead of the transition. A longer runway provides time to make necessary changes to meet your overall objectives. It also allows ample time to put financial records in order, evaluate tax scenarios, and ensure the business is both sustainable and attractive to the next owner.

Final Thoughts on Transitioning Your Business

When it comes to transitioning your business, it isn’t a decision to be made quickly. Taking the time now to plan for the transition will help you better meet your goals when you do decide to sell your business.

About the Author

As Senior Director of Business Owner Advisory Services at FNBO, Lynne manages and develops business advising, succession planning and estate plans for banking customers. She enjoys helping families develop their long-term goals and guiding them toward success.

The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.