As a business owner, your primary focus, other than family, has been on your business. It’s successful and profitable, and now it’s time to sell it.

It sounds simple: sell your prosperous business and move on. In reality, it’s nowhere near that simple. Your work is not done. You must continue to make strategic decisions that impact your future and the future of the business.

One of the first things you need to understand is the difference between being a company owner and a financial investor. With so much of your life vested in building your business, it can be challenging to let go. You probably know most of the employees. You know every nook and cranny in your buildings. You know precisely what has made your company tick, making it profitable.

But once you sign the papers, it’s no longer YOUR business, even if you still have a stake in it.

One of the best ways to stem some feelings of loss is to leverage your control in structuring the sale and the transition after the sale.

A solid knowledge and understanding of how a business sale works and how to structure that sale is vital. There are many matters to balance, such as the need for liquidity, the impact of taxes, compensation, and the management transition. Working to help achieve that delicate balance during your departure can improve the odds of a better deal and make you feel more in control of the transaction.

What Are The Risks In The Sale Of Your Business

It is an understatement to say there are numerous risks in selling your business, no matter how attractive the sale may look.

For example, a cash deal may be very appealing for the quick liquidity it provides. But on the downside, it can produce a very large capital-gains tax payment. One way to avoid some of that tax for the first year is to build a deal that includes stock, potentially allowing some gains to be deferred until the stock is sold.

The downside to taking stock over cash is that now your wealth is clustered in one investment, and you are holding stock in a company you are no longer in charge of. There are some workarounds to this problem, though. Structured selling, philanthropic giving, and hedging are the most common strategies, and a blend of all three can be utilized.

Hedging can be accomplished in a couple of ways. A “put” gives downside protection. You purchase the right to sell a stock at a preset price regardless of how low that stock might go. A “call” is the opposite; someone buys the right to purchase stock from you at a set price, no matter how high the stock price may go.

Combined, these two strategies give you protection in case of a decline and a structured way to sell your stock to generate income to offset the cost of purchasing the put. These structured sales are a way to allow you to sell off stock from a business purchase gradually.

A more complicated tactic is the forward sale which provides liquidity while deferring the tax bill. It is a contractual agreement where the seller promises to deliver the stock at a future date in exchange for immediate cash. The IRS considers it a loan until the stock is delivered.

Charitable giving is another way to diminish the risk of significant stock positions.

A popular route is utilizing a charitable remainder trust – an irrevocable trust that gives the donor a set income for life with the balance going to a predetermined charity, generally at the time of the donor’s and spouse’s death. Using this option, a donor converts a non-liquid asset into an annual income and gets a large tax deduction simultaneously.

Establish The Right Team!

The key to establishing successful strategies for selling your business is putting together the best team of advisors possible. This should be your first decision once you begin considering a sale.

This is a challenging chore! You must do your due diligence and find a group of financial advisors with a broad spectrum of skills, including estate planning, tax law, philanthropic giving, and portfolio investment.

It is vitally important to find investment specialists whose style matches yours. If you aren’t willing to take investment risks, you need to make sure whoever you hire understands and is willing to execute more carefully and cautiously.

Your investment team also needs to be able to personalize their services to meet your needs. They don’t need to rush you into investing. Take time and understand what the next phase of your life will be. If it turns out you need some of those funds to, say, start a private equity fund, it’s much easier to unwind short-term investments to get at your capital. That also makes sense when it comes to your personal life.

The slower you go with investing, the more time you will have to consider “what next?”

Because you are a proven businessperson and successful at building a business, opportunities will always exist for you to invest. You will have the luxury to be patient, weigh options, and find new doors to open.

Many people believe as you age, you need to think about retirement. Probably an equal number of people cringe at the thought of retirement. Regardless of which one of those groups you fall into, taking the time to consider every available option is vital.

You may consider becoming an adviser to private equity or venture capital firms. Allowing you to keep a hand in business and make your own investments.

Equally important, it lets you stay abreast of developing technologies, new markets, and new ideas. Often this route leads to another stint at the helm of a different company.

There are other routes, like starting a private equity fund. With your sale money as seed, you can attract capital from other investors and buy into new, growing businesses.

Regardless of your route, the opportunity to rest, reset and look to the future before making a decision will be rewarding and beneficial.

As a family office, Hutchinson Family Offices has a team of advisors that work for your best interests. We have tax planning experts, business succession planning consultants, and portfolio managers available to our clients.