When is the worst time to sell a business? The simple answer: when you have to.
The best time to sell, of course, is when you don’t have to—when the business is on an upward trajectory, and you have the flexibility to walk away. One of the most powerful negotiation tools in any transaction is the ability to say “no.”
You’ve likely heard the advice that you should always run your business as if it were for sale. That’s sound guidance. It’s also a certainty that every business will eventually experience a succession event. If your plan is to sell to an unrelated third party, controlling the timing of that event is critical.
Consider two businesses with identical balance sheets and income statements. The first is owned by someone mid-career, with a strong next generation of leadership in place. The second is owned by individuals nearing retirement, with little or no leadership succession plan. Despite identical financials, the first business is clearly more valuable.
Why? Because the first owner has options. They can take the time to find the right buyer, command higher multiples, and—when negotiations become difficult—say “no” and walk away. Buyers, especially those with experienced advisors, are sophisticated. If they sense that a seller must complete a transaction, negotiating leverage shifts quickly and pricing often declines.
It is common during the due diligence phase—even after a letter of intent has been signed—for buyers to seek price reductions based on findings. When negotiations become challenging, the ability to confidently walk away is invaluable. Selling a business is a strategic process, and controlling the timing is one of the most important factors in maximizing value.
Planning for a Third-Party Sale: Key Considerations
If you anticipate that your succession plan will involve a sale to an outside buyer, consider the following:
- Control the timing. Plan several years in advance and operate as though your business is always for sale. Preserve your ability to say “no.”
- Develop next-generation leadership. Ensure there is a clear plan for who will run the business if you are unexpectedly unavailable.
- Maintain clean, current financials. Produce accurate monthly financial statements no later than the 15th of the following month.
- Establish a history of credible reporting. Annual audited or reviewed financial statements from your CPA firm enhance credibility.
- Focus on EBITDA growth. Incremental improvements in EBITDA can significantly increase enterprise value.
- Prepare a rolling five-year forecast. Update it annually to demonstrate forward-looking performance.
- Create accountability. Hold regular, structured board meetings and consider adding outside advisors or board members—even if you are the sole owner.
- Evaluate entity structure. Ensure your structure is optimized for tax efficiency in a sale transaction. Flow-through entities (e.g., S corporations or LLCs) are often more favorable for sellers.
- Separate real estate from operations. Holding real estate in a separate entity can provide flexibility during a transaction.
- Understand purchase price allocation. Sellers prefer capital gain treatment, while buyers seek accelerated deductions. The allocation among goodwill, equipment, and other assets has significant tax implications.
- Define goodwill clearly. Goodwill represents the premium paid above the fair value of tangible assets and includes factors such as brand reputation, customer relationships, location, and proprietary processes.
- Monitor market activity. Stay informed about transactions and valuation trends in your industry.
- Obtain professional valuations. Periodic valuations can help you gauge readiness and track progress.
- Identify potential buyers. The expansion of private equity has created a broader pool of qualified buyers.
- Align your personal financial plan. Understand how a sale will support your lifestyle and ensure your estate documents are current.
- Diversify personal net worth. Reduce reliance on the business by maximizing retirement plan contributions and building assets outside the company.
Final Thought
As discussed, a succession event is guaranteed. It is far better to have it well planned and on your terms than to be forced into a transaction without preparation or flexibility.
Ready to begin planning for the future of your business? Contact the DMJPS team to discuss your succession and exit planning goals.
Michael Gillis, CPA, PFS, CGMA
Mike Gillis, CPA, PFS, CGMA is a Partner at DMJPS CPAs + Advisors. Mike has more than 30 years of experience in public accounting. He is a frequent presenter on tax matters, advises privately-held businesses and their owners, and works extensively in the area of succession and exit planning strategies for businesses.
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