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  • Lee Henry

5 Things Business Owners Should Do 5 Years Before Selling Their Business

Selling a business is a monumental decision that requires meticulous planning and preparation. To ensure a smooth and profitable transition, business owners should start preparing at least five years before they plan to sell. Here are five crucial steps to take:

1. Estate Planning

Estate planning is vital to protect your wealth and ensure your legacy. This process involves setting up wills, trusts, and other legal structures to manage your assets. Start by consulting with an estate planning attorney to:

  • Establish a comprehensive estate plan that minimizes tax liabilities.

  • Ensure your business interests are appropriately transferred to your heirs.

  • Protect your assets from potential creditors.

  • Plan for any charitable contributions you wish to make.

  • Determine the lowest defensible value (LDV) of your business to minimize estate taxes. This involves a strategic valuation to defend against IRS challenges while ensuring a lower tax burden. The more time between the gift and sale, the more defensible your valuation becomes.

  • Make sure your professional team of Attorneys, CPA, Financial Advisor, and Life Insurance Agent are all working together for your Estate Plan. Building your estate plan is a team effort and you want to ensure no professional is working against the other in an unknown fashion.

2. Tax Preparation Strategies:

Understanding and utilizing tax strategies can significantly impact the financial outcome of your business sale. One such strategy is the 1202 Exemption, which can provide substantial tax benefits for small business owners:

  • Section 1202 of the Internal Revenue Code allows for the exclusion of capital gains on the sale of qualified small business stock (QSBS).

  • To qualify, you must have held the stock for at least five years and meet other specific criteria.

  • Consult with a tax advisor to determine if your business qualifies and how to maximize this exemption.

  • Timing is crucial: Ensure you meet the holding period and other requirements well in advance of the sale.

  • Hiring a CPA that is knowledgeable about not just income tax strategies, but also business exits is crucial for your overall success. Not having the right professionals could cost you millions in unnecessary tax consequences.

3. Quality of Earnings Reports

Having reliable and transparent financial records is essential to attract potential buyers. Quality of Earnings (QoE) reports provide an in-depth analysis of your company's financial health:

  • These reports highlight earnings, cash flow, and any anomalies that may affect valuation.

  • Engage a reputable accounting firm to prepare QoE reports regularly.

  • Ensure all financial statements are accurate, detailed, and compliant with relevant accounting standards.

  • Plan for working capital calculations early: Accurate working capital calculations are crucial for negotiations and can significantly impact the purchase price. Including these in your QoE reports provides potential buyers with a clear picture of your business’s operational liquidity. The QoE provider can provide insight into how buyers will look at your business, and provide ways to derisk your financial reporting.

  • A well-prepared QoE report can instill confidence in buyers and support a higher valuation.

  • Timing your financial audits and QoE reports to align with your selling timeline ensures the most current and accurate data is available to buyers.

  • For example: We had a client who paid all of their expenses with a credit card and didn't cost the expenses out to each job as they came up. At the end of the year, the credit card was reconciled. Which caused a working capital calculation nightmare. The Golden Shield accounting team fought tooth and nail to work out a reasonable working capital calculation with the buyers. The seller ended up leaving more working capital than what he normally would have, but better record keeping in advance would have prevented that. Had they just allowed our team to start working with him farther in advance, we could have saved him over $1 Million.

4. Hiring Capable Management

A business that can operate independently of its owner is more attractive to buyers. Building a capable management team is crucial:

  • Identify key roles and recruit experienced professionals to fill them.

  • Gradually delegate responsibilities to these managers to ensure smooth operations.

  • Provide training and development opportunities to strengthen their leadership skills.

  • Demonstrating a strong, autonomous management team reassures buyers that the business will continue to thrive post-sale.

  • Business owners that derisk the family dynamic in a business (father, son, daughter, spouse, mother, etc.) with a capable management team will increase the overall value of the business. For example a business with an entire family management team with a $4 Million EBITDA may trade at 4X-6X multiple (depending on what business type) and with a capable management team may trade at 6X-8X multiple of EBITDA.

  • Start early to allow sufficient time for management to fully take over operational duties, proving the business's independence from the owner.

5. Hire Golden Shield Business Brokers

Engaging a professional business broker can streamline the selling process and help you achieve the best possible outcome. Golden Shield Business Brokers specialize in:

  • Assessing the value of your business and determining an appropriate asking price.

  • Marketing your business to a wide network of potential buyers.

  • Negotiating terms and managing the due diligence process.

  • Providing expert advice and support throughout the entire sale process.

  • Strategizing to build an exit plan: Golden Shield Business Brokers will work with you to develop a comprehensive exit plan focused on building business value.

  • Incorporating strategies to increase valuation multiples: These strategies include improving financial performance, enhancing operational efficiencies, and highlighting growth opportunities.

  • Engage a broker early to benefit from their expertise in preparing your business for sale, marketing it effectively, and timing the sale for optimal market conditions.


By taking these five steps—estate planning with a focus on the lowest defensible value, implementing tax preparation strategies like the 1202 exemption, preparing quality of earnings reports with early working capital calculations, building a capable management team, and hiring a trusted business broker like Golden Shield Business Brokers to strategize and increase your business’s value—you can position your business for a successful and profitable sale. Start early, plan diligently, and seek professional advice to ensure a smooth transition and maximize the value of your hard-earned business. If you need help finding other professionals such as attorneys, CPAs, financial advisors, etc., that specialize in helping business owners exit and the after effects, Golden Shield has a network of world-class professionals we can refer you to.

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