When initially considering a transaction, it is important to understand why. Are there issues with succession? Are you looking for growth capital? Is there a change in the competitive environment? Is it purely to create liquidity for generational wealth for your family? Capturing value from a transaction goes beyond just maximizing the sale price and your strategy should be informed by your priorities.

As you prepare for an exit, focusing on five key areas can help ensure that the transaction serves your long-term goals. This process involves treating the sale as part of a larger financial strategy, not an isolated event. With proper planning, selling your business can be a moment that simplifies – and clarifies – your financial picture and can provide greater freedom for you and your family.

Key preparatory steps include:

• Creating robust systems – Businesses that rely on a single hard-to-replace individual (such as an owner) are inherently less valuable than those that are ‘plug and play’ for acquirers.

• Strengthening the leadership team – Ensuring a smooth transition for a potential acquirer means having a strong management team in place that can maintain continuity after the exit.

• Enhancing EBITDA – Business sales are often priced at a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). Operational improvements made today can be one of the most efficient levers to maximize exit value.

• Understanding what the business can realistically produce, how that compares to your personal financial needs, and your window to sell – Owners should balance realistic expectations of sale proceeds and their desired lifestyle. At Azimuth, we can help clients understand how to achieve lifestyle and financial goals in various transaction scenarios. In addition, because windows to sell can shift or close, owners must weigh lifestyle goals with the timing of a potential sale based on the attractiveness of the window.

Prep work can often start three years or more in advance of a potential exit. While this work requires foresight and patience, it enhances the potential value from a transaction for both you and your family.

#3: Plan For What Comes Next

At some point in the transaction process, business owners should spend some time considering a fundamental question: On a personal level, what do you want to do after the transaction?

Owners are the ultimate decision-makers of a company. Transitioning from that role to potentially one of an employee – or even retiring altogether – can be a jarring change. For owners looking to remain at the company they built, discussions about post-exit employment are an essential part of the negotiation process. Staying in the business in some capacity can allow for additional compensation or transaction proceeds (terms discussed in the next paragraph). And for owners looking to retire after the sale, retiring to something can often be a more fulfilling strategy (such as consulting, mission-driven, or nonprofit work).

These personal considerations will directly inform the optimal deal structure. Compensation can come in the form of cash up-front, rollover equity, future salary, and performance-based earnouts. Cash up-front is generally the most certain, and the willingness to accept any other form of compensation depends on a seller’s risk tolerance. Additional terms to consider are customer/backlog retention requirements and non-competes. Many owners also want to consider how the transition will impact their employees, meaning that proceeds are not the only factor.

Additionally, it is important for owners to discuss with their advisor how their investment portfolio should look after the sale. For example, any rollover equity should be considered as part of an owner’s overall allocation. Since this is private equity exposure, it might limit an owner’s desired exposure to other illiquid assets.

#4: Develop an Income Tax Strategy

Selling a business can trigger a substantial tax bill for owners. From a tax standpoint, the overarching goal of a transaction is to maximize after-tax proceeds. With thoughtful structuring, it is often possible to mitigate some tax liability. One potential way to achieve this is to ensure that as much compensation as possible is categorized as part of the sale (taxed at lower long-term capital gains rates) rather than employment-related income (taxed at higher ordinary income rates).

The tax advisor can help navigate the tax benefits associated with different deal structures. For example, sellers should explore whether performance-based earnouts or deferred compensation can be categorized as part of the sale so that they qualify for capital gains treatment. Moreover, while the conditions are rather specific, having shares that qualify under Qualified Small Business Stock can significantly reduce an owner’s tax burden.

Owners are often inundated with complex or esoteric strategies to minimize their taxes during an exit. However, it’s important to remember that selling a business is an inherently tax-efficient process, since it likely transforms future earned income into capital gains. We would encourage business owners to especially consider the objectives of a transaction, particularly when it comes to liquidity, when contemplating various strategies. For example, does restricting access to your capital align with your original goals? How important is simplicity to you?

#5: Consider Your Generational Family Goals

Finally, owners should consider how the sale fits into their family’s wealth planning. With the right approach, you can coordinate the sale with your estate strategy and legacy goals.

Opportunities for coordination include:

• Valuation discounts – With proper advanced planning, it may be possible to gift shares in a private company to family members at discounted valuations (due to lack of control and marketability). This can be a tax-efficient way to transfer value out of an estate.

• Setting up trusts – Thoughtful trust structures can be used to ensure that sale proceeds are structured and maintained to be in line with long-term family goals. For instance, access to a trust may be restricted by age or even life events, such as buying a home or starting a business.

• Establishing and achieving philanthropic goals – For families focused on legacy and philanthropy, selling a business can be an opportunity to fund charitable endeavors. This can be done through private foundations, donor-advised funds, and other tax-efficient structures.

The exit process isn’t just a corporate transaction. It can also represent a significant inflection point in the wealth strategy for you and your family.

Conclusion: Beyond the Price Tag

An effective sale process can help owners capture the most value from their exit. But there’s more to value than just maximizing the sale price. As you prepare for an exit, it is important to consider how the transaction impacts your personal financial picture.

This is where an investment advisor experienced in liquidity events can add value, helping you prepare for what comes next. At Azimuth, we have extensive experience working closely with owners to develop a plan that aligns with their values and goals. Our team also includes members with experience in these types of transactions.

As you consider your own transaction, addressing these five points can help maximize value both personally and professionally. Should you or someone you know benefit from a conversation about the topics discussed in this article, we invite you to contact our office by phone or email.

Selling a Business: 5 Ways to Prepare for a Successful Transaction

#1: Assemble a Team of Professional Advisors

#2: Complete the Prep Work

#3: Plan For What Comes Next

#4: Develop an Income Tax Strategy

#5: Consider Your Generational Family Goals

Conclusion: Beyond the Price Tag

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Selling a Business: 5 Ways to Prepare for a Successful Transaction

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