Business Succession Decision Tree

If you are looking to transition or sell your business, you may be unsure how to get started. Selling a company is not easy, particularly if the business has been part of your family for many years. While making the decision to sell your business can be emotional, breaking the process into steps will make it more manageable. Here are six steps to help you with the business succession decision process.

Step 1: Decide if you want to keep or sell the business.

If you are the owner of a privately-owned, family-run business, there are likely a range of financial and family issues to consider. Asking yourself some targeted questions can help you evaluate your path forward:

  • How’s the business doing?
  • Are we planning to keep the business in the family or sell it?
  • If we are going to sell, do we know any potential strategic buyers to approach?

These questions will prepare you for a potential sale and help you select, educate and empower your succession team to preserve the long-term health and success of the company.

Making the decision to sell an asset you’ve owned from the ground up can be difficult. Proactive checkups with your financial advisor provide the opportunity to ask the right questions upfront and prevent seller’s remorse in the long run.

Step 2: Look at the business like a buyer would.

A significant factor in your decision will be the financial aspect. Here are a few questions to ask to help you evaluate the soundness of the business:

  • Are we operating as efficiently and profitably as we can?
  • Are we paying rent that is unnecessary?
  • Do we have personal expenses that can be eliminated?
  • Do we have a company plane or other asset we don’t need?
  • Are we paying the salary of an employee or relative who is not adding value to the business?

Making critical decisions about whether to sell extraneous assets or terminate unnecessary employees will help you see your business from the eyes of a buyer.

Step 3: Evaluate your company’s future cashflow potential.

In addition to looking at your company’s current financial state, it’s critical to evaluate the future earning potential of your business. Consult an expert to provide a business valuation with industry-specific EBITDA (Earnings before interest, tax, depreciation and amortization). It will be necessary for you to prepare a budget for at least the next year and possibly multiple years in the future to properly value your business. Tip: Family member salaries and certain personal expenses often need to be adjusted to accurately reflect the true value of the business.  

Step 4: Determine how to sell your company.

You’ve made the preliminary decision to sell your business and assessed the current and future financial position – now what? The next step is to decide whether to look for a financial buyer or a strategic buyer for the transaction.

Financial buyers such as Private Equity Groups (PEGs) are likely interested in buying your business primarily for a return on their investment. On the other hand, a strategic buyer may be a company in your industry looking to expand their reach. Take the time to research potential buyers before taking the next step. Consult a financial advisor or broker to make sure you’ve done your homework.

Step 5: Develop a financial plan.

Before you sell your business, it’s imperative to have a plan in place for the proceeds. Asking these questions will get you started:

  • What are you planning to do with the proceeds?
  • What are your personal financial needs to maintain your expected standard of living?
  • Are you planning to share proceeds with longtime employees, or do you have plans to make any charitable contributions?
  • What are your tax costs?
  • Will there be ongoing rental income from currently owned real estate?

Prior to the transaction, set up an investment account with your investment advisor, who can examine all the aspects of your investment portfolio. Transitioning from an illiquid, income-producing asset to a liquid asset takes significant planning, and an advisor can help you analyze and anticipate your changing lifestyle. TIP: Don’t forget your taxes. Your tax situation may be different in the future, so be sure you account for taxes when planning.

Seek guidance to help you evaluate your immediate needs and plan for the future, including setting aside funds for future tax payments. Investment advisors, wealth management consultants and family offices can serve as the buffer or “bad guy” to long lost relatives or friends with an investment idea who may come out of the woodwork asking for money. In addition, they provide an objective assessment on what is best for you.

Step 6: Put your estate plan in place.

Now that you’ve made the decision to sell your business and you have a financial plan in place, the final stage is to draft your estate plan. Estate planning is more than just leaving your assets to your loved ones, and it’s not a one and done project. Consult an expert who can regularly review and update your plan as your portfolio grows or tax issues change.

If you are thinking about selling your business, ask some preliminary questions before you get started. Selling a business is a momentous decision, especially if you built the company from the ground up or it’s been in the family for generations. Before you make your decision, engage an expert to help you manage the process. Taking the time now to ask the right questions will pay off in the long run.

David Morgan, LBMC Founder and Chairman LBMC Financial Services, can be reached at