February, 2015
By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC

Most business owners who have been operating for 30 years are successful or they would have closed their doors long ago. They have made plans every day in the business and most decisions have been good ones. Their business has grown, and it has a substantial value. Now they are thinking about someone else taking over.

It might be someone in the family, maybe one or two key employees, or perhaps someone else within their industry. With three different types of possible buyers there are many different succession plans that can be created. The complexity of selling a family held business is different than anything they have ever done, and that is why lots of preparation and thought should be given to this process to make it a success.

If you are going to be successful in transitioning your company you need to start thinking about the best outcome you are looking for. What would be your best outcome? Usually it involves selling the company at a high value and paying the least amount of tax on the transition. How do you get a successful sale, with a high value, and the least amount of taxes? The answer is you start planning three to five years ahead of time.

Selling Inside the Family you should try to increase the gross margin as much as possible in the last three years. Show that the company has an increasing profit and that the expenses are either flat or being reduced. For most of you your payroll is your biggest expense and it has probably gotten out of hand over the last 30 years. During this three years of preparation get the payroll and all of your expenses close to national averages or less.

Selling Outside the Family there are additional areas for you to work on. First, in the last three to five years before selling the business to someone else pull together an advisory team which would include an excellent corporate attorney, the CPA that handles your corporate tax return and your personal tax return and also an independent fee-only financial advisor. The three individuals that you pick will help you put together the blueprint for you to use in order to position your company in the best light over the next three years. Have your attorney start preparing documents that are necessary such as Triple Net Lease Agreements, Stock Redemption Agreements and other legal agreements that are needed to protect your business. Have your accountant start estimating what the taxes would be if you sold the business and estimate the taxes not only for the seller but also for the buyer. If the buyer is one of your children or key employee it will be important to know their tax bracket versus your tax bracket. If the buyer is someone in your industry, it would be helpful to know their tax situation. There are ways to sell the company so that some tax benefits go to the seller and some go to the buyer so that the sale becomes a win/win situation for both parties.

Once the sale has been agreed to you will have a lot of cash to invest which will need to last another 20 or 30 years or longer for you and your family. The financial advisor that you pick needs to be independent and a fiduciary just like your attorney and accountant. Financial advisors that are also a registered investment advisor with the SEC are required to function as a fiduciary and provide advice that is designed specifically for you.

There is a good chance that a 65 year old business owner will live to at least 85 or 90 years of age, which means the cash from this sale and the remainder of your net worth will have to last for at least 20 to 30 years. Now that you have sold your business you do not have a machine to help generate more profits in the future. The net worth that you have at the time of sale is all you have to protect yourself and pass on to your family. At this point you should reduce the amount of risk that your net worth has and increase the interest and dividends.

You have work to do inside the business in your daily activities and you have work to do outside the business with your advisory team in the last three to five years. With the right business decisions and the right team of advisors you will definitely sell the business for a higher profit and the least amount of taxes.

Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .