Selling the Business? Five Considerations for Making the Most of Equity Events

In recognition of National Small Business Week, which took place earlier this month, Truepoint is sharing ideas about the unique wealth management challenges and opportunities faced by business owners.

Part 1: CEO Michael Chasnoff on maximizing the value of a business.
Part 2: Tax Specialist Ginger Ittenbach on
tax planning for business owners

For a business owner, selling a company may conjure up conflicting emotions. On the one hand, a lucrative sale can make a real difference in terms of financial security, including for future generations. But on the other hand, it may lead to a sense of finality and questions about what to do next. The situation may even be trickier for family-owned businesses, especially if family members continue to work at the company after the sale.

In our experience at Truepoint, we have worked with several clients who have sold their businesses or experienced other, large-scale equity events. While individual circumstances are always unique, in each case, there are several steps and activities business owners can take to ensure they achieve the outcomes they want.

1. Plan ahead for the future

Few equity events happen out of the blue, meaning that business owners can prepare themselves and their companies in advance of a sale. For example, cleaning up the books is a very good first step – and one that can enhance the value of the business. Truepoint CEO Michael Chasnoff touched on how a disciplined approach to expense management can clarify how well a business is performing and what it’s worth.

Considering what you want for the company and the type of buyer you are looking for is also important. Much will depend on the type of business. For instance, relationship-driven businesses may require key employees (including owners) to remain in place after a sale. Similarly, some buyers may want to manage the business largely as it runs today and preserve the existing culture, while others may look to make big changes or even “flip” the business to another buyer in the near future. Shared values may be important in some cases, receiving the highest bid in others. Family legacies may also come into play. The key is to understand what’s truly valuable and differentiating about the company before seeking to sell it.

2. Understand the options for structuring a deal

There are many options for structuring the sale of a business. For instance, private equity groups typically seek to recapitalize a business and may keep previous owners around as advisors. In other cases, a business owner may want to roll over a portion of ownership, but still serve in a senior executive or hands-on managerial role.

The close linkage of the business owner’s personal finances to the business is an important variable here. For instance, installment plans for the timing and release of funds can reduce upfront tax impacts. Another option is to take a lower overall price for the business itself, but increase compensation via a multi-year consulting agreement or employment contract.

3. Take a holistic approach to planning

This multitude of options for structuring the deal is just one reason why all of your advisors should work together. Typically, that means:

  • Financial planning that clarifies the income necessary to fund the ideal retirement or future ventures
  • Estate plans and wealth preservation strategies that define how much goes to trust and how much children, grandchildren or other beneficiaries will inherit
  • Tax planning that can help define the most advantageous structure of the deal and shelter as near-term income gains (again, see Ginger Ittenbach’s recent Viewpoint about strategic tax planning)

The big idea is that these are not independent or standalone activities, but rather should be managed as part of an integrated and collaborative process. A general rule of thumb: the larger the equity events, the more detailed and longer range plans should be.

4. Don’t overlook personal factors

We advise our clients to consider thoughtfully the personal impacts that go with selling a business. The implications go far beyond accounting – to say the least. Many business owners have invested enormous time and energy into building their companies and may face, after the completion of a sale, a certain feeling of “what’s next?” (Of course, all types of retirees, not just business owners, may experience such feelings.)

Starting new ventures or mentoring younger business owners may be the answer for some, while others may focus on spending time with family, pursuing hobbies or getting involved with philanthropic causes. Obviously, there is no single right answer. But, from a financial planning perspective, it’s critical to have a detailed understanding of the short- and long-term cash flow implications of an equity event. That’s the first step to knowing you will have enough money to enjoy the next chapter of your life.

5. Beware “sudden wealth syndrome”

The risks of “sudden wealth syndrome” are also worth mentioning. Large, one-time cash payouts may lead some individuals to splurge on luxury travel, expensive cars, second (or third) homes, or other indulgences. There is a reason that stories of the rapid dissipation of great wealth have become a staple of popular culture!

Again, it’s best to be clear and conscious in the decision making, based on clear grasp of the financial realities. A few ill-timed splurges may cause near-term pressures if payouts extend over long periods of time or are subject to performance contingencies. The point is, business owners must be aware of just when and how they will receive the proceeds from an equity event.

That logic also applies to plans for setting up trusts, providing money to heirs or making philanthropic donations. In short, the best advice for business owners just after an equity event is: be careful about both spending too much and giving away too much.

Achieving the outcome you want at the time of an equity event

Business owners are unique in that much of their net worth is very closely intertwined with those of their companies. And never are those links more intricate or substantial than at the time of an equity event. That’s why a broad-based view and integrated approach to planning work best to achieve the outcomes you want – both financially and personally.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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