Business Succession

FNAQs to Protect your Success

FNAQs: Business Succession

You’ve worked hard, achieved success, and you will leave your business: planned or unplanned! Whether you want to scale back, sell, or transfer to family or employees, it’s simply good business to plan an exit that can help secure your goals with minimal risk. Yet many owners procrastinate planning and leave significant value behind.

Not ready from either a financial or mental standpoint? That’s the point. Today’s preparation can prevent tomorrow’s calamities. Years of hard earned wealth is at stake. Developing an even stronger financial position cures a lot of mental stress and helps pave the way to a confident, secure retirement.

Your daily routine is demanding. How do you begin to organize and prioritize all the necessary pieces of the puzzle. The range of required expertise creates complexity, and can span legal, tax, investment, insurance, valuation, and estate planning. No one adviser can do it all. How to simplify?

An astute, competent adviser who understands the range of issues can serve as your quarterback and help you orchestrate the team you need to succeed. An holistic financial plan helps you understand your options, quantify a range of values for different business transfers, and identify gaps before an event!

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These questions help you focus on goals with ways to mitigate risk:

Questions 1-4: What’s goals are next? Risks to lifestyle: what could go wrong?
Questions 5-7: Asset concentration & diversification; reasonable range of business value
Questions 8-10: Transfer methods, taxes, and legal protections


1) What do you want to achieve with your exit?

You had goals when you started the business; what goals do you have for an exit (either full or partial). Establishing clear written goals for transition and life after you leave your business helps you examine your thoughts and feelings. Goals should include financial, personal, and professional. Who is an ideal buyer? What timeline do you have? Include family members or key employees to the extent they are important to the process.

In what ways will you refocus the energy and intellectual stimulation that brought you success? It’s an important consideration that many don’t consider until they’ve left the business.

2) What lifestyle can you afford; how long will your money last?

An accurate assessment requires a full review of your entire assets and liabilities, so you can determine a sustainable income level once you exit the business. Three common errors of omission occur in developing a reasonable estimate:

  • Failure to account for spending perks run through the business (country clubs, car, etc). These pre-tax expenses convert to after-tax when you exit. The spending difference can be substantial.
  • Failure to understand risk exposures. Whether your goals seek to preserve capital, optimize spending, extend portfolio life, or efficient transfer to your heirs, short-term losses can be devastating when you have less time to recoup losses. Your investments, retirement accounts, real estate etc. should be weighted to reflect your current return need and risk tolerance. Your withdrawal strategy should align with your goals; accounts and investments structured to optimize tax efficiency. Other protections may be in order.
  • Failure to obtain an objective business valuation. A business may have a range of values depending on who the buyer may be. It’s good business to understand your valuation, as well as how transfer options and deal structure may impact value.
An astute adviser will help you be aware of your risks, so you can avoid costly errors of omission.
3) Do you have a competent team of advisers working in concert for your goals?

An array of tax, financial, legal, valuation, banking, and insurance issues will apply in varying degrees depending upon your facts and circumstances. Your advisers can help identify gaps so you can make necessary adaptations, keep your plan aligned with your goals, and secure your future. Time is your ally if you plan early and make needed corrections to remedy gaps. It may make sense to appoint one of your advisers to take the lead in orchestrating the moving parts to keep it focused on your goals.

4) What could go wrong without a thoughtful plan?

Below are a few of the numerous contingencies that should be considered.

  • Buy-Sell Agreement: An outdated or non-existent buy-sell agreement that doesn’t clearly articulate a buyout price and funding options can leave you exposed to conflicts that lead to lawsuits. No one wins.
  • Transfer/Sale Options: Know the tax, valuation, control, financing, and deal structure options that are available to you well in advance of your sale, so you have time to make changes that will favor your transfer. Communicate the plan on a regular basis to all those involved.
  • Will, Estate, and Financial Planning: these planning areas cover how you want your assets bequeathed, protected, and invested. They all need to be updated periodically. Healthcare directives, tax, and distribution planning are also vital considerations.
  • Business Valuation: Many deals never happen due to unrealistic valuation expectations. Most owners don’t know the objective value of their business, nor the range of values that may exist depending upon which buyer type is viable.
  • Other Internal/External Risks: Scenario planning can help prepare against unplanned events and protect you and your family. A couple prime examples:
    • Who would run the business if something happens to you? A 50-yr. old is 3 times more likely to become permanently disabled than die prior to age 65.
    • If a key employee(s) left, how could that impact operations? How have you incentivized them to stay?

“I’m too busy running a business” or “it won’t happen to me” are common reasons/excuses for doing nothing. Procrastination and luck aren’t good business practices.


With so much at stake do you want to leave yourself and your loved ones exposed to a low probability, high loss event?
5) How much of your wealth is tied up in the business?

Many owners believe in the “myth of control.” That is, they own the business, therefore they have more control over their destiny than with other assets. Still, a privately held business is an illiquid asset that is subject to industry and economic forces that have wiped out many small businesses. These forces are often beyond an owner’s control.

Accordingly, many owners don’t diversify their wealth along the way. Often due to the belief that profits are best reinvested inside the company. That may in fact be the highest return potential; however, there’s a point at which diversifying your wealth into more liquid investments will more safely serve your goals. Concentration of wealth in an illiquid asset can leave you exposed to multiple risks beyond your control. An established plan to sell or transfer the business can help you gain liquidity with less risk.


Asset concentration makes you rich; diversification keep you that way!
6) What "range of values" is reasonable and available for your business?

Privately held businesses can have a wider range of value when contrasted with public companies that trade on an exchange. Typically they are smaller, have more risk, and require higher expected investment returns.

The pre-tax “range of values’ concept is illustrated below. The important thing to note is these different values are all based on the same level of business profit. The different values are based on the buyer’s investment perspective and ability to pay. It’s also key to note the after-tax values are much different than pre-tax values, which highlights the need to plan in advance so you have a reasonable idea of what to expect.

Book Value: this accounting construct is often cited by the owner or their CPA’s. In fact, it is not a recognized standard of value and is seldom a reliable indicator of value.

Fair Market Value (FMV): most formal valuations default to this standard that is widely used by the business appraisal community. Typically used for gifting, management buyouts, and ESOP situations.

Investment Value: Private equity groups (PEG) have become big players in the privately held business market. Auction sales processes also tend to drive higher value. Businesses typically need to have a bare minimum of $1 million in EBITDA to access these markets.

Synergy Value: a competitor may pay a higher price because the business may provide them synergies such as access to a new market or channel, reduced price pressure, or let them eliminate overhead.



7) How can you maximize business value from a buyer’s perspective?

With a current objective business appraisal in hand, you can assess where your business stands relative to like businesses. A good appraiser or business broker will be able to give you the buyer perspective and advise on different ways you can enhance business value and salability. It’s prudent to polish your gem before you go to market. Common pitfalls are poor financial statements and accounting, business concentration risk (too much reliance on a key employee, a small number of customers, or a single product), and poor balance sheet management.

Any investment is only worth what a buyer is willing to pay. Getting a professional’s objective assessment can save you time, money, and frustration.

8) Which sales/transfer method is a viable option for your business?

Depending the on the size, scale, and profits of the business there are various ways to sell or transfer: Internal employee(s); family; charity; co-owners; outsider (owner stays on with company); outsider (owner retires); IPO

9) How to minimize taxes of your sale/transfer method?

A sale price isn’t the same as after-tax proceeds from a sale. After-tax money is the only amount that you can spend! Working with your tax and estate planner in advance of a sale can help mitigate capital gains and estate tax exposure. 

If an owner has estate tax exposure, there are numerous advanced planning techniques such as gifting, sale of minority interests, ESOPs, or holding stock in trust or another entity that can help minimize the tax bite.

Income tax exposure will vary greatly depending on whether you are selling assets or stock. Most buyers prefer asset sales to minimize their contingent liabilities post-sale; sellers prefer selling stock for the preferential capital gains treatment. 

Deal structure is a vital component especially in smaller businesses when seller financing may come into play. Creative financing can often bridge the difference in buyer/seller perspectives and facilitate a deal that works for both parties.

Sales to insiders (family or employees) can be structured to your personal control, tax, and cash flow needs.

Sales to outsider’s present different dynamics depending on whether the sale is full or partial. Varying degrees of risk, tax, and control need to be assessed.

10) What other legal documents should you be prepared for?
  • Purchase agreement: this document transfers ownership of the company. It includes the parties involved, Price & Terms, Representations & Warranties as to the condition of the business, and Indemnifications for the buyer’s protection.
  • Non-compete agreement: helps give the buyer comfort that the seller won’t open up another business and take all of his customers with him.
  • Loan-agreement (if seller financed): this can be a win-win for buyer and seller. Buyer can use cash flow from the business to help pay off the note; the seller can defer taxation with an installment sale and collect interest on the unpaid principal. The seller has risk if the buyer tanks the business.

Nothing herein or elsewhere on this site constitutes investment, legal, or tax advice. Please see Disclosure.

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