What Issues Should I Consider When Planning For The Sale Disposition Or Succession Of My Business 2024?

As a small business owner, planning for the sale, disposition, or succession of your business is essential to ensure a smooth transition and protect the legacy you’ve built. Here are critical considerations to keep in mind as you prepare for the future:

1. Resolve Pending Liabilities

Before proceeding with a valuation or appraisal, address any pending or potential liabilities such as lawsuits, disputes, IRS audits, or property damages. Resolving these issues early can present a cleaner financial picture to potential buyers, enhancing the value of your business.

2. Accurate Business Expenses

Review your business expenses, including compensation packages and retirement plan contributions. Ensure they are in line with market rates. Accurate representation of these

costs is vital to reflect the true profitability of your business and avoid any discrepancies during the valuation process.

3. Income Consistency

If your business income fluctuates significantly, develop a plan to address this during the valuation process. Potential buyers will need a clear understanding of your financials, so consider strategies to present your income in a consistent and favorable light.

4. Client Dependency

Evaluate whether a large portion of your revenue comes from a small base of clients. This can be a risk factor for potential buyers. Prepare your clients for the transition and consider offering contingencies that assume certain clients will stay with the business post-sale to mitigate this risk.

5. Key Person Risks

The success of many small businesses relies heavily on the skills and expertise of the owner or a key person. Plan well in advance for the training and development of a successor. Additionally, consider key person insurance and other strategies to mitigate risks associated with the potential loss of key individuals.

6. Family Succession

If you intend for family members to take over the business, carefully consider how this will impact your legacy and estate planning. Ensure that all family members are on the same page, especially if some are not interested in continuing the business. Clear communication and planning can help avoid conflicts and ensure a smooth transition.

7. Post-Sale Involvement

Decide the extent of your involvement in the business after the sale or your retirement. Define your role clearly to ensure a smooth transition and continued success for the new owners. This can include consulting, mentoring, or serving on the board.

8. Engage Outside Experts

Hire valuation experts, attorneys, and accountants to assist with the appraisal and sale of your business. Their expertise can help you navigate the complexities of the process and ensure you receive a fair value for your business.

9. Improve Business Valuation

Enhance the value of your business by cleaning up the balance sheet, paying off debts, and ensuring all necessary equipment and assets are in place. A tidy and well-organized business will be more attractive to potential buyers.

10. Installment Sales

If considering an installment sale, understand how future business performance could impact payment continuity. Ensure you have agreements in place to protect your interests and secure your income.

11. Emotional Preparedness

Avoid making rushed decisions due to emotional or external pressures. Develop a contingency plan to ensure your business is sale-ready at all times. This will help you make more informed decisions when the time comes.

12. Tax Planning

Review how the sale of your business affects your tax planning goals. Consider AGI/MAGI-sensitive strategies and look for ways to minimize tax impact, such as installment sales, charitable deductions, or harvesting losses.

13. Dispute Prevention

Ensure buy-sell agreements and operating agreements are in place to prevent disputes among partners or heirs during the sale. Clear agreements can help avoid conflicts and ensure a smooth transition.

14. Estate Tax Concerns

Plan for potential estate tax issues by gifting non-controlling shares during your lifetime and setting aside funds for estate illiquidity. Proper planning can help avoid financial strain on your heirs.

For personalized guidance tailored to your unique situation, contact Diversified Asset Management, Inc. at info2info@diversifiedassetmanagement.com or (303) 440-2906. Our experts can help you navigate the complexities of business succession and ensure a successful transition.

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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.