Knowing What Counts Podcast

Exit Strategy Essentials: Protecting Your Legacy When Selling Your Company

• Tim Provost, CPA • Episode 20

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What IS Succession Planning? 

Selling your business represents the culmination of years—sometimes decades—of hard work, risk-taking, and passionate dedication. Yet many business owners approach this critical transition without the preparation needed to maximize value and protect their legacy.

Patrick Leary, an experienced CPA specializing in privately held companies, takes us deep into the realities of business succession planning. He reveals why the process should start years before you intend to exit, beginning with a clear-eyed assessment of your true goals. Are you looking to maximize financial return? Transfer to family members? Ensure your company's continued presence in the community? These foundational questions shape every subsequent decision in your exit strategy.

Financial transparency emerges as perhaps the most crucial element of a successful sale. "Nothing will derail a transaction faster than not having good books and records," Patrick warns. Buyers require confidence in your financial reporting, making clean, reconciled accounts and organized documentation non-negotiable. The Letter of Intent (LOI) also demands careful attention, as its structure—particularly whether you're pursuing an asset or stock sale—carries enormous tax implications that could mean hundreds of thousands or even millions in difference to your after-tax proceeds.

Beyond the financial and legal aspects, Patrick addresses the emotional journey of selling a business that's been "part of the family" for decades. Many owners struggle to separate their emotional attachment from market realities during valuation discussions. Even after closing, the transition often requires sellers to remain involved for months, making the sale a process rather than an event.

Don't wait until you're ready to exit to begin planning. Connect with experienced advisors now to implement value-building strategies, optimize your tax position, and ensure you're fully prepared for the most significant financial transaction of your life. Your business legacy deserves nothing less.

To learn more about MP CPAs visit:
https://thempgroupcpa.com/
MP CPAs
413-739-1800

Speaker 1:

Welcome to the Knowing what Counts podcast, the place where expert guidance meets smart financial decisions. Whether you're a high net worth individual or a thriving business, the experts at MPCPAs are here to help you protect and optimize your wealth. Let's get started, because success begins with knowing what counts.

Speaker 2:

Because success begins with knowing what counts. Succession planning isn't just about handing over the keys. It's about protecting your legacy, minimizing tax exposure and ensuring a smooth transition. Learn how accountants help business owners plan their exit with foresight and precision. Welcome back everyone. I'm Sofia Yvette, co-host slash producer, back in the studio today with Patrick Leary, partner at MPCPAs. Patrick, how are you today?

Speaker 3:

Good Sofia. Thank you for having me.

Speaker 2:

Yes, it is a pleasure to have you on Now. Today, we are joined by Patrick Leary, a experienced CPA who works with privately held companies. We'll be discussing what business owners should know when preparing to sell their company, and let's go ahead and get into it. So, patrick, when an owner decides to sell their business, when does the process start?

Speaker 3:

The process starts very early on. We work with our clients very closely. The first thing we need to do is evaluate what the goals of the owner are. What do they want to get from this transaction? So, do they want to maximize value for themselves? Do they want to pass the business on to the next generation? Or perhaps there's some current employees that are interested in the business? Do they want the business to live on in the community and continue what they've built over the years? The community and continue what they've built over the years. So once we know these answers to these questions, we can then move forward with the process. But in knowing what their goals are early on is very, very important.

Speaker 2:

Now, once you know the owner's goals, what's next?

Speaker 3:

So once we know their goals, then we need to work through what is our process and we get into preparation. So preparation is key for these transactions to be successful. Being well prepared will facilitate a transaction, will maximize value, and really what we want to do as you are working through a potential sale is we don't want there to be any surprises that could derail the sale. Buyers want transparency, they want reliable financial information, and being organized inspires confidence in them. It leads to a smoother transaction.

Speaker 3:

So what we will do is generally, we'll look at the financial statements for the company for the past three to five years, get them organized. We'll look at customer and supplier contracts, employment agreements, inventory, accounting methods, et cetera, and we look at all of these, not as we have perhaps in the past, but we look at it through the lens of a potential buyer. So we're looking for those holes and we aren't legal professionals, so we advise that, all right, let's bring in a team, let's bring in a mergers and acquisition attorney, maybe we bring in an M&A advisor and that team works together, going through your documents again, getting everything prepared well in advance of a transaction, and this preparation could be a year, two or three years before you're thinking of exiting. But the more lead time you give yourself, the better off you're going to be.

Speaker 2:

Wow. So, patrick, how important is it to have clean books and records?

Speaker 3:

important is it to have clean books and records. Clean books and records is absolutely imperative. Nothing is going to derail a transaction faster than not having good books and records. You want to make sure everything's reconciled your cash, your accounts receivable, your inventory. You don't want to leave anything and say, well, this is too small. You want to be consistent, transparent. Again, this is your time to evaluate your records. Look at your inventory reserves, look at your accounts receivable reserves. Is there anything that we should clean up before going to market with the business? So let's get your books and records ready to go. We want to minimize questions that the buyer is going to have that could cause a problem later on down the road.

Speaker 2:

So, patrick, let's go back. Can you explain what a letter of intent is and why it matters?

Speaker 3:

Sure, a letter of intent, or LOI, is an agreement outlining the proposed terms of the deal the price structure, timeline, milestones, network and capital targets, escrows really everything is laid out there and this sets the expectations for the buyer and seller and for the buyer to conduct their due diligence for an agreed upon period. Usually they'll have exclusive period to do due diligence and this is a very important document because this is where really the meat of the transaction is outlined. You want to get professional advice before signing this because this is going to impact future negotiations. So the structure of the transaction is in there and this is very important from a tax standpoint. So generally, a buyer will purchase all the assets of a company or they're going to buy the stock, the owner's stock of the company. If they buy your stock, you as the seller are going to enjoy the benefit of lower capital gain tax treatment versus if your assets are purchased. So, again, extremely important that we know what the structure is a stock deal or an asset deal? You can also have the net working capital targets laid out. So the net working capital is a calculation of current assets less current liabilities that are required to be left within the company at the date of sale. The reason this is important is the buyer wants to set a target so when they close they don't need to immediately inject cash into the company. So they set a networking capital target and this networking capital target generally is based on historical averages but there can be some nuances to it. So again, what are those nuances and how do we calculate this and how would we maximize it for our seller?

Speaker 3:

You can also have escrows.

Speaker 3:

So an escrow is money that is held back at closing.

Speaker 3:

If you had to have a network and capital calculation target, if you have a network and capital calculation target, then you will have a network and capital escrow, usually 90 to 120 days. So 90 to 120 days post-closing the buyer has the opportunity to count the inventory, look at the receivables or collect receivables, pay the payables and they will go through and then make a calculation of what is the net working capital at closing. They will share that with the seller, the seller. Again, very important that you go through the details and make sure you agree with that net working capital number because once everybody agrees, the escrow is released and the amount of escrow that's released some could go to the buyer, some could go to the seller, again depending on the actual networking capital compared to the target. And then you can also have some general escrows 12 to 18 months that the buyer may want money set aside just for unknown liabilities that haven't been disclosed and at the end of that 12 to 18 month period, if nothing happens, then the amount is released to the seller.

Speaker 2:

So, patrick, what are common mistakes business owners make during the sale?

Speaker 3:

Yeah, there's seldom a transaction that we're involved with that doesn't run into some sort of challenge. Some of the more common ones failing to have your financial records in order, withholding potential issues from the buyer. Again, transparency we talked about that earlier. Transparency is crucial Ignoring your personal, the seller's planning, tax planning their wealth, managing post-sale unreasonable expectations for time. So I always caution my clients that finding the buyer is step one, but then to get to the finish line is a long process. Several months is not uncommon because you have the period for the buyer to perform their due diligence, then you have legal documents. The buyer might need financing. So all of this takes longer than expected. So I always caution potential sellers that all right. If you think this is going to be three months, plan on five.

Speaker 3:

The other issue that we face with our clients is these businesses are businesses that they have started or maybe they've purchased and they've been working in these businesses. For businesses that they have started or maybe they've purchased and they've been working in these businesses for 10, 20, 30 years, it's like part of the family. So there's a lot of emotion involved with the business and when it comes to valuing the business, obviously they want to value their business very high, but we need to take the emotional aspect out of it and say, all right, what are the market conditions and what can this business really generate in the market and what is its true value? So those are a couple areas where we do see some challenges and some mistakes that are made.

Speaker 2:

What should a seller do post-sale?

Speaker 3:

There'll be a big sigh of relief and it'll be emotional Again. This could be a company that they've shown up to for the past 20 or 30 years. Post-sale if you've prepared right, you've planned for your taxes, you've planned for your investments post sale. But there can also be a period, a transition period, so the buyer may require that you stay on for three, six, nine months in order to transition customers. Make sure the employees are okay, so on. So the date of closing isn't necessarily the end, but it's getting you there. So just be ready for that. Engage with your advisors, make sure that you've accomplished everything you want to accomplish as part of the transaction.

Speaker 2:

Wow, now this has been a fantastic overview. Before we wrap up, do you have any final advice?

Speaker 3:

Sure, we've only scratched the surface on this. This is a very complicated process. This is likely the biggest transaction that the owner will face is the sale of their business. Don't rush into it. Get organized, get yourself a good team, good advisory team, and talk to them early. If you think you're want to sell in two, three years, start talking now, because there could be steps that you take now that are going to increase the value of your business later. So be prepared and you will have a much smoother process.

Speaker 2:

Wow, patrick. Thank you so much for those insights today. We'll catch you in the next episode. Have a fantastic rest of your day.

Speaker 3:

Thank you Appreciate the time.

Speaker 1:

Thanks for listening to the Knowing what Counts podcast. Ready to optimize your wealth and protect your future, visit thempgroupscpacom or call 413-739-1800 to connect with our team of experts. Remember, success is about knowing what counts.