Perspectives

John Decker, Senior Vice President, Head of Business Advisory Services & Equity Capital Markets Liaison

Transitioning the ownership of a business can be a dynamic, yet complex, change with myriad implications. Whether it is for retirement, a new venture calling, or unforeseen circumstances, successfully navigating a transition requires careful planning and solid expertise.

Without a plan and a strong team to execute, the process can be challenging. Unprepared transitions may disrupt operations, jeopardize value, and leave employees and successors adrift. But it doesn’t have to be this way. Proactively planning for a transition before launching a formal process provides for greater flexibility and increases the chances of a successful outcome. Below is a checklist detailing the steps a business owner should consider when preparing to transition the ownership of their company.

Financial Statements

1. Prepare Historical Financial Statements: Ensure that financial statements (income statement, balance sheet, cash flow statement) for at least the last 3-5 years are accurate and complete.
2. Conduct Financial Audits: Engage a reputable accounting firm to audit the financial statements and provide credibility to potential buyers. If not audited, consider having statements reviewed.
3. Normalize Earnings: Adjust financial statements to reflect the company’s true earnings potential by removing non-recurring expenses, owner’s discretionary expenses, and other non-operational items.
4. Create Forecasted Financial Statements: Develop projections for the next 3-5 years, including detailed assumptions and justifications for the forecasts, as well as identifying potential growth opportunities.

Tax Preparation

1. Review Tax Returns: Ensure all tax returns for the last 3-5 years are filed and up to date.
2. Tax Compliance Check: Confirm that the company is in compliance with all federal, state, and local tax regulations.
3. Tax Planning: Consult with a tax advisor to explore strategies for minimizing tax liabilities on the sale of the business.

Readiness of the Company

1. Operational Efficiency: Streamline operations to improve efficiency and profitability. This might include optimizing supply chains, reducing costs, and improving and/or automating processes.
2. Documentation: Ensure all business processes, policies, and procedures are well-documented.
3. Legal Compliance: Verify that all licenses, permits, and regulatory requirements are current and in good standing.
4. Customer and Supplier Contracts: Ensure that contracts with customers and suppliers are up to date and transferable to the new owner.
5. Employee Agreements: Ensure that employment agreements are clear and non-compete clauses are in place to retain key employees post-sale. Having a stable of capable, well-trained employees reduces transition risk.
6. Stakeholder Alignment: To the extent possible, take steps to ensure that all shareholders, family members, key employees, etc. are aligned around the strategy for ownership transition.

Attractiveness of the Company in the Marketplace

1. Market Positioning: Highlight the company’s market position/share, competitive advantages, and growth potential.
2. Brand and Reputation: Strengthen the company’s brand and reputation in the market.
3. Customer Base: Maintain a diverse and loyal customer base to lower the risk of high customer concentration and the cost of customer turnover.
4. Intellectual Property: Ensure all intellectual property (patents, trademarks, copyrights) is protected and up to date.
5. Growth Opportunities: Identify and present future growth opportunities for the business.
6. Risk Mitigation: Address and mitigate any major risks that could deter potential buyers.

Types of Advisors Business Owners May Need

1. Business Broker or Investment Banker: Assists in finding potential buyers, marketing the business, and negotiating terms.
2. Financial Advisor: Helps with financial analysis, retirement planning, post-sale investment strategies, and cash needs management.
3. Accountant: Provides tax planning, financial statement preparation, and ensure overall financial health.
4. Attorney: Handles legal aspects of the sale, including contract preparation and compliance issues.
5. Tax Advisor: Offers advice on tax implications and strategies to minimize tax burden.
6. Valuation Expert: Provides an independent valuation to help set a fair and realistic asking price.
7. Consultant: Assists with operational improvements and strategic positioning before the sale.

Additional Preparations/Steps in the Process

1. Valuation: Obtain a professional business valuation to determine the fair market value of the company. This may be an included service if enlisting a business broker or investment banker.
2. Confidentiality Agreements: Prepare Non-Disclosure Agreements (NDAs) to protect sensitive information during negotiations.
3. Data Room: Set up a secure data room with all necessary documents for potential buyers to review during the due diligence phase.
4. Marketing Plan: Develop a marketing plan to attract potential buyers, highlighting key selling points of the business.
5. Transition Plan: Create a transition plan to ensure a smooth handover to the new owner.
6. Communication Plan: Plan how and when to communicate the sale to employees, customers, and other stakeholders.

By readying the business and its stakeholders in advance of entering a process to transition ownership, business owners can ensure that their company is well-prepared to create a successful outcome — maximizing value and minimizing potential issues during and after the process.

This material is being provided for educational and informational purposes only. D.A. Davidson & Co. is a registered broker-dealer and registered investment adviser that does not provide tax or legal advice. Information contained herein has been obtained by sources we consider reliable but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original article. These opinions are subject to change at any time without notice. Copyright D.A. Davidson & Co., 2024. All rights reserved. Member FINRA and SIPC.