Morgan Stanley
  • Wealth Management
  • May 15, 2023

Preparing for the Transaction of a Lifetime

Selling a business should be the reward for years of entrepreneurial savvy and hard work. Here’s how to make the process go smoothly.

For many small to medium sized business owners, the eventual sale of their business is an integral part of their retirement planning.

The two key determinants of business transition success is leaving enough time to plan, and having an adequate plan in place. While that may seem obvious, 27% of family business owners say they have a robust business succession plan.1

The best strategy is to plan long before the target date of a sale. If you’re planning on selling to a third party buyer, at least three to five years usually allows for enough time to prepare the business for sale and allow for a series of negotiations. If you’re selling to an employee or passing along to your family, it also allows for time for training and any transition process that needs to occur.

Whether you’re contemplating transferring your business interest to family members, liquidating assets or selling your share to current management or an outside party, review these important steps as you think about your business succession plan.

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Determine What You Want for Your Business

How you transition your business depends a lot on your situation. Where do you want to be in three, five or ten years? Do you want to remain involved with your company? Maybe you’re ready to redirect your entrepreneurial energies toward philanthropy or just enjoying a well-earned retirement. In the words of that great financial sage, Yogi Berra, “If you don’t know where you’re going, you may not get there.”

You’ll also need to consider your employees, key customers and suppliers. If you have been integrally involved in your business and the relationships you have formed with the stakeholders are the foundation of your business, it is important to appropriately present and time the communication of your planned transition.

For many businesses, the two key determinants of business transition success is leaving enough time to plan, and having an adequate plan in place.

Assemble Your Advisory Team

Regardless of the size and complexity of your eventual transaction, you may want to engage legal counsel, an accountant, an investment banker or business broker and, of course, your Financial Advisor. If you are considering transferring your business ownership and interests from your estate to your family, you will likely not need an investment banker or business broker—but an outside business appraiser would still be suggested.

Choose an attorney well-versed in the intricacies of purchase and sale agreements and wealth transfer. You likely already have an attorney you work with on contracts, litigation and other legal issues, but it’s a good idea to find an attorney who specializes in business succession.

Your accountant should have extensive experience in minimizing the tax impact of monetizing or transferring a business. An investment banker, business broker or third-party business appraiser will analyze your business and the competitive environment to arrive at a realistic valuation. These professionals can also provide valuable input in structuring your transaction.

Finally, your Financial Advisor is there for the big picture. They will understand your succession in the context of your overall financial picture and can help protect the connections between your personal objectives and business ambitions. Your Financial Advisor should also work with your other advisors to help them understand your priorities and make certain they are reflected in your succession strategy.

What Is Your Business Worth?

This is often one of the most difficult aspects for any business owner. After all of the time and effort put into the business, sometimes a true and accurate valuation is difficult to gauge.

Begin by commissioning your investment banker or business broker to conduct an analysis of the market environment. You’re looking for the pool of potential buyers, and what they’re looking for in an acquisition target.

Your investment banker or business broker should also develop alternate strategies for you to consider—beyond simply selling your business to a potential buyer. Many business owners have made their successful exit through a sale to an employee stock ownership plan (ESOP) or a private equity group, and others have unlocked liquidity through a recapitalization of the business.

By exploring multiple options, each of which has its own pros and cons, you can sometimes expand your pool of potential buyers or investors and realize greater value from your transaction.

Update Financial and Estate Plans

Don’t wait until eventual negotiations to realize that you should have updated your financial plan. Take the time now to consult with your CPA, attorney and Financial Advisor about how much you will need to achieve your retirement goals or pursue whatever it is you plan to do once you’ve made your exit.

You should also take this opportunity to review estate planning issues beyond your will with your estate attorney. Update the way your personal and business assets are titled, if necessary—and remember that it may take significant time to implement the complex strategies used to transfer assets and minimize your tax liability.

Keep Growing Your Company

Finally, keep focusing on growing the company to increase its valuation and on creating a cash flow machine that buyers can envision taking over with minimal changes. If you are transferring your business, this is the time to complete any gifting strategies that you and your advisory team have formulated.

Identify your growth levers and push them full speed ahead. To maximize the attractiveness of your business, identify what drives growth and focus your attentions accordingly. If you have partners who are not on board, consider a strategy in which you or the business would buy out their equity stake. Uncommitted owners can be challenging to a successful sale.

No matter what your time horizon to transition your business, the time to start planning is now. Talk with your Morgan Stanley Financial Advisor today and start the conversation.

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