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Blogs

Before you sell your business            (Part 1)

Sid Queler

February 08, 2022

Start early, choose the right structure, gather the right experts—and don’t forget the tax and financial planning implications.

In 2020, about 70% of privately held business owners expected to transfer ownership of their businesses to another party within a decade. Almost one-third expected their businesses to change hands sooner.1 The reasons for the transfers are diverse. A founder and/or owner may be ready to:

  • Retire, either partially or completely
  • Monetize one business and start another
  • Pass the business to the next generation 
  • Diversify their assets
  • Pursue some other objective

Planning is essential if the business owner wants to maximize a company’s value, especially if the company is being sold to a third party. Equally important, planning can help ensure the impact of the sale doesn’t adversely affect the personal finances of the owner or other investors. 

Positioning for success

In this post and the next, I put forth five considerations that can help business owners position for success before, during, and after the sale of a company. 

Start early. Selling a business tends to be a long-term process. Every sale is unique and the more time you spend preparing your company for sale, the better the asking price is likely to be. In an ideal world, a business owner will have three years to prepare for a sale. During that time, the owner can optimize the company’s value by:

  • Cleaning up balance sheets, if necessary
  • Considering the role and retention of key employees
  • Verifying and strengthening contractual agreements (including personnel agreements)
  • Organizing business records and key documents
  • Reviewing and documenting corporate governance policies and procedures

Choose the right structure. Choosing the right structure for a sale is essential. The seller’s goals for the sale will have a direct impact on the structure chosen.  Do they want to receive a stream of income, continue to participate in management or receive a lump sum to start a new business?

In addition, sale structure will affect tax consequences for buyers and sellers, determine who is responsible for company liabilities, and influence other key issues. There are many ways to structure a sale, including:

Asset sales: The company sells some, or all, assets and retains liabilities that are not assumed by the purchaser. The tax consequences will depend on the type of entity being sold. In general, buyers prefer asset sales.

Stock sales: The buyer purchases stock and any current shareholders realize capital gains on the difference between the stock basis and the pro-rata share of the purchase price. In general, sellers prefer stock sales.

Cash sales: A sum of cash or property is exchanged for all, or a portion, of the sellers’ interest in the business. This can have significant tax consequences.

Earnouts: Typically, the sale price is contingent on specific benchmarks being reached within a set period following the sale of the business. This option may be useful if there is a gap between buyers’ and sellers’ expectations for future profits.

Installment sales: As the name implies, this structure provides the seller with a steady cash flow for a specific period of time and allows a buyer to pay over time. It is often considered when a sale is occurring within a family and the departing founder wants to receive a stream of income.

Sales structures can be complex. As a result, it often benefits sellers to work with a team of experts. The right team will help prioritize goals for the sale, explain the nuances of various structures, and determine which option is preferred. 

You can learn more about how to choose the right experts—and make sure the sale of your business doesn’t have adverse personal financial and tax consequences—by reading Before You Sell Your Business (Part 2)

You can also prepare for the sale of your business by reading The Privately-Held Business, and reviewing the resources available here. If you would like to talk with me about the sale of a business, please get in touch. You can contact me at Sid.Queler@cibc.com or 617.531.6954.

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships. 

1 Craig R. Everett, “2020 Private Capital Markets Report,” Pepperdine University, P.109, May 2, 2020.