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Preparing an Owner for a Third-Party Sale Using Pre-Sale Planning

Submitted by John Brown on Mon, 11/30/2015 - 4:18am
Preparing Business Owners for a Third Party Sale

In last week’s article, we met James, the fortunate recipient of a $19M offer to buy his company. Well, he felt lucky until, as he was about to sign the Letter of Intent, an advisor pointed out that between taxes and the payment structure, he’d leave the closing table with $0 in his pocket.

You might wonder how business owners can find themselves that deep in the sale process without an understanding of its basic financial structure. That mystery is second only to the mystery of how not one of James’s advisors had ever asked him (a 63-year-old owner) if he were thinking about one day leaving his business. Not one advisor ever asked what actions James had taken to prepare for that day or whether they could help.

Advisors trained in Exit Planning do ask owners questions because fundamental Exit Planning encompasses third-party sales and all of the other Exit Paths that an owner might take to exit (a transfer to children, a sale to co-owners or children, or a sale to an Employee Stock Ownership Plan). To distinguish fundamental Exit Planning from the planning advisors do for owners anticipating a sale to a third party, we call the latter pre-sale planning.

Who Should Ask About Pre-Sale Planning

Advisors who don't specialize in M&A often ask themselves, “Why should I become involved in an owner’s pre-sale planning?” The answer is simple: Few other advisors are asking even a single question about it. If advisors don’t proactively reach out to owners, owners will do nothing to prepare: They don’t know what to do or whom to ask for help. Simply asking owners what their plans are for leaving their businesses is vital to their success and the advisor's first step to becoming involved in their planning. Of course, once advisors have taken that step, it’s important to understand the Exit Planning Process as it relates pre-sale planning.

Pre-Sale Planning

When owners schedule a meeting to talk to their advisors about selling their businesses to an outside buyer, they usually do so because a potential buyer has approached them. They may already have signed a confidentiality agreement or even a Letter of Intent to sell their company. They want advice on how to proceed or perhaps for their advisor to look over the proposed documents to “make sure everything is alright” before they sign. At this point, it is usually too late to back up and start at the beginning of the planning process.

It’s important for advisors to reach out to owners and prospects now to educate them about the merits of pre-sale planning. The greatest benefit is that planning in advance of a buyer’s offer allows owners to first assess how large a future offer must be to meet their wants and needs. If they wait until an offer is tendered, they have neither time nor money to devote to growing business value and cash flow.


The first steps in pre-sale planning are identical to Exit Planning but differ in some important details.

  1. The advisor and the owner must articulate and understand the owner’s values-based goals. There’s more to an exit than cashing out and moving on. Advisors may need to dig to determine whether any of the values-based goals (e.g., culture, community, or legacy) are important to the owner. If they are, advisors must help owners realize that a sale to an outside party may not achieve those goals.
  2. It is vital that owners know, before going to market, what the market considers the business to be worth. Advisors who are not investment bankers or business brokers must recruit and work with those members of the Advisor Team to assign an accurate valuation.
  3. When and owner wants to sell to a third party, advisors must walk them through the tax impact and other purchase price reductions that nibble (or devour) sale proceeds, which is what happened to James Padgett from the previous article.

Pre-sale planning prepares owners before:

  • Going to market and entering the sale process.
  • Spending significant money, time, and emotional energy without assurance that the sale can achieve all of their goals.


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