Keep Your Eye on the Exit

Posted on Thu, Oct 11, 2018 ©2021 Drucker & Scaccetti

Modern-Family-and-LGBTQ-Tax-Consulting-&-Financial-PlanningBy: Michael W. Donahue, CPA, CFP, MT


In the past few years, we have assisted family business clients in a time of strong economic growth. This growth continues across many industries. In meeting with these clients, we’ve noticed an increase in the owners’ interest in “cashing in” on their businesses’ value. Getting to the best possible sale price is the focus of today’s blog.


When we discuss available sale options with owners, there are essentially two – an internal sale or an external sale. An internal sale is really a shift in ownership to either the next generation or a combination of the next generation and management. Most of these sales are external sales, and usually to private equity firms.

There are many underlying themes and issues that may arise when considering the sale of your business. In these transitions, we have found a three-step formula useful when implemented as soon as possible in the process:


  1. Know your buyer,
  2. Know the value of your business, and
  3. Anticipate common problems


Know Your Buyer

Knowing the motivations behind the private equity firms proposing to buy your company can significantly increase the after-tax flow from your sale. For example, suppose this is a purchase that is late in the equity firm’s acquisition cycle (commonly referred to as an add-on acquisition). You can better position yourself for a more favorable stock sale as opposed to an asset sale as the buyer’s acquired basis in assets would have less significance if they are merely selling the whole portfolio in a couple of years. Other opportunities exist if the buyer has tax-loss carryforward.


Know the Value of Your Business

We are not suggesting a strict valuation engagement for your company. In the end, you will be selling the future earnings of your company at some multiple. Both the earnings and multiples must be explored at the start of the sale process. You can control the quality of earnings while external forces (like interest rates) may prescribe the multiples portion of the equation. However, minor changes in multiples can have a major impact on valuation.


Anticipate Common Problems

Without exception, the most common problems encountered in a sale to a private equity firm involve your company’s earnings and liquidity. Earnings are considered valuable if they are “sticky;” meaning your customers will continue to return to the company for products and services AND the company continues to attract new customers after the change in ownership. Additionally, when private equity pays you for your company, they do not want to write any additional checks for the acquisition. This means the company you sell must retain enough liquidity; that is cash, accounts receivable, and inventory in excess of trade payables. In contrast, if you sell your company with too much liquidity, you have simply discounted your sale price as you could have distributed this excess to yourself prior to the sale. The liquidity issue will be an area ripe to increase the cash flow from your sale.


Private equity transactions are currently very common and the norm for sales of family-held companies. Call on The Tax Warriors® at Drucker & Scaccetti. With decades of experience and scores of highly skilled advisors, we can assist you in keeping more money for your family in the transaction.


Topics: family business planning, Business Valuation, Sale of business, Exit Planning

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