If you own a business and plan to sell it eventually, you’ll want to maximize the resulting profits. Start early, says a recent article, “Is the Sale of a Business in Your Future? Be Informed. Plan Early,” from Inc., because it can take years to prepare a business for a successful sale.
A few factors to consider:
- Understand the multiples used by your peer groups and why some companies sell for higher prices than others.
- Adapt and evolve your business, so it achieves a higher value at the time of sale.
- Work with an estate planning attorney and tax adviser to optimize both long-term tax efficiency and financial security after the business is sold, whether for retirement or your next venture.
- Create a plan aligned with goals and values for the capital created when the business is sold.
Understand the value of your business. Key performance indicators (KPIs) reflect more than your sales and overhead costs. Industry trends, potential risks, opportunities and financial and operational health are all concerned. Cash flow matters, as do interest coverage, days sales outstanding, inventory turnover, return on equity and cash flow to revenue. So does customer concentration risk and the management structure in place now and in the future.
How does your company stack up compared to your competitors and industry averages? Planning for the sale of a business requires regular assessment of all these metrics, making the changes needed to improve the value of the business, and continuously measuring and evaluating.
Estate planning protects profits. Today’s historically high estate exemptions, due to sunset in 2026, could play an essential role in whether you plan on selling the business soon. Everyone has a lifetime exemption allowing them to transfer assets during their lifetime or after death without incurring federal estate or gift taxes. In 2024, the lifetime exemption is $13.61 million. Unless Congress acts to renew this level, it will revert to approximately $7 million as of January 1, 2026.
Consider this example: a married couple with a net worth of $50 million has never used any part of their lifetime exemption. With no estate planning, they die in 2026, and the exemption is $7 million. Their combined estate tax liability could be $14.4 million.
Working with an estate planning attorney to prepare to take advantage of the exemption, the couple could use their full lifetime exemption in 2024 or early 2025 by creating irrevocable trusts to benefit each other and their children or grandchildren. With the guidance of an experienced professional, they can transfer a combined $27.22 million into irrevocable trusts, taking this significant amount out of their taxable estate. With planning, they could avoid paying more than $5 million in federal estate taxes.
This is a simplified version of one strategy available. Business owners also have other opportunities to obtain discounts on assets for valuation purposes,
Estate planning attorneys are already working with clients to prepare for the end of these exemption rates. As 2025 progresses, you’ll want to contact your own estate planning attorney sooner rather than later. Discuss your timeline for selling your business in light of these changing exemptions, which may turn out to be a significant factor.
Reference: Inc. (Oct. 28, 2024) “Is the Sale of a Business in Your Future? Be Informed. Plan Early”