Nearly every business owner eventually receives an unsolicited call from someone claiming to have the perfect buyer for their company. Many of these calls are phishing expeditions designed to gauge interest in selling. Some solicitations are legitimate. Regardless, most business owners are caught off guard. After spending years building a company, many owners have not yet considered what they want their eventual exit to look like – or what the financial consequences of each option might be.
I am Gus Martinez, a CPA and tax manager with Killingsworth Spencer in Roswell, GA. Our CPAs advise owners of small to mid-sized closely held businesses throughout Metro Atlanta. This is the first in a series addressing several important issues business owners should consider well before they are ready to exit.
You cannot improve a financial outcome you have not evaluated or modeled
Much of the financial outcome is determined years in advance
Every transition faces tradeoffs; neither the owner nor the buyer is likely to receive everything desired from a transaction
Begin by identifying the possible successors
An owner may sell to an outside buyer, transfer the business to existing management, or sell or gift it to family members. Each path creates different tax, cash flow, financing, and operational consequences. For owners hoping to keep the business in the family, the first questions are not financial: Do your children want to own and operate the company, and are they capable? Do not assume. Ask them and make certain they understand both the opportunity and the responsibilities involved.
If the next generation wants to continue the business, financial modeling becomes essential because the dollars involved must work harder. Can the company generate enough cash to provide the retiring owner the income needed over a specified number of years? Can it pay the resulting taxes to fund the purchase, compensate the new owners, and retain enough working capital to continue operating and growing your legacy asset?
A transaction may look attractive on paper but place too much financial pressure on the business after the transfer. Conversely, careful planning completed several years in advance may reveal opportunities to improve cash flow, reduce taxes, restructure ownership, or make the eventual transaction more affordable to the next generation.
Model the outcome before making the decision
A sound exit analysis should consider more than the proposed selling price. It may include:
The owner’s expected after-tax proceeds
Timing and reliability of future payments
Buyer’s ability to finance the transaction
The company’s working capital needs after the transfer
The tax consequences to both parties
The owner’s continuing role, if any
The financial effect on family members and key employees
These conversations can be difficult, but having them early allows everyone to make informed decisions and helps protect both the family and the business.
The tax advisory team here at Killingsworth Spencer can work alongside your attorney, financial advisor, valuation professional, and other advisors to evaluate potential exit strategies. By modeling the alternatives before a transaction is underway, you gain time and perspective to address problems and improve the eventual outcome.
In the next article, I will discuss why much of a business owner’s financial outcome is determined years before the actual exit – and how advance tax planning can make a meaningful difference.
Killingsworth Spencer in Roswell, GA, serves business owners in Fulton, Cobb, and Forsyth Counties. For more information on any tax matter or to schedule an appointment, please call us at 770-552-8286 or visit us at www.killingsworthspencerllc.com
Disclaimer: This post is for general information only and should not be taken as legal, tax, or financial advice.