8 factors that most impact your business’ net proceeds

By Erich R. Holmes, CFP^®, CEPA^®, EA, Managing Director and Senior Transition Advisor, Truist Wealth

Most business owners focus on ‘maximizing enterprise value’ as they contemplate a potential business sale. But giving equal consideration to ‘maximizing net proceeds’ of the deal and paying closer attention to the following drivers of net proceeds may actually result in more wealth to your family post-transaction.

It’s important to fully understand the differences in tax treatment for each type of sale structure, as well as the increased tax benefit to the buyer for engaging in one type of transaction versus the other before engaging in any discussions with potential buyers. Several of the factors you’ll want to assess include:

• Recognizing any savings the buyer could potential receive for an asset sale versus stock sale treatment
• Calculating the FMV of the assets in the business and their tax basis—and making sure you understand the class type of each asset, the ordering rules for allocating the purchase price to those respective classes, and the associated tax treatment of each
• Aligning your personal wealth post-transaction advisory team with your business transaction team—to ensure a thorough understanding of the overall taxation impact

Often in a business sale transaction, there will be payments to the seller that are received in years after the transaction (e.g., earnouts or seller financing payments). These payments will have a net proceeds impact, so any deferred payment structure should include:

• Obtainability of the payments
• The risk of not receiving payment
• Your level of control over the outcome
• The period of time and interest rate factored into the payments
• The taxation of the payments received in the years after the close of the sale transaction

The allocation of risk between buyer and seller also impacts net proceeds. For escrow and holdback, the same concerns and considerations relating to deferred payment structures discussed above apply. In the event representation and warranty insurance is required for the transaction:

• Make sure amount, premium, and/or underwriting fee are in line with market rates
• Review of the amount of the deductible and the exclusions
• Determine an appropriate cost sharing between buyer and seller
• Decide how long the policy needs to remain effective

Generally, buyers prefer sellers to remain actively engaged in the business for a period of time after the transaction to help with continuity, integration, customer relations, etc. As the seller, make sure you’re comfortable with the time you’re expected to stay on, and the compensation for your services. In the event you sell your entire interest in the business and have no rollover of equity, it’s often better to negotiate a separate independent consulting agreement.

Determining whether or not to retain ownership of any business real estate and/or sell it is a personal decision that you’ll need to make based on what you’re looking to accomplish. Often, it comes down to a decision as to whether you prefer to increase net proceeds by selling the real estate, or increase net earnings by leasing it back to the operating company. 

The debt obligation on the books of the business goes unreviewed when you’re solely focused on maximizing enterprise value. But understand how the debt is being accounted for in the transaction is very important to determining net proceeds. It’s often the second or third biggest item that impacts net proceeds.

In order to maintain normal operations, buyers will generally require a target working capital calculation to stay in the company upon completion of the transaction. This determination is often a negotiated item, so try to come up with a strategic approach to forecasting working capital needs.

Is it financially advantageous to change your state of residency ahead of a transaction? The answer depends on the type of transaction, the ownership structure of the business, the intent of the business owner(s), and the operations of the business.

The timing of your review of these items will be critical to successfully increasing your net proceeds. It’s best to understand as many key considerations as possible ahead of engaging in meaningful conversations with qualified buyers or receiving any LOI. This will allow you to set the tone upfront and be confident and prepared.

Lastly, while maximizing net proceeds and enterprise value are vitally important, they shouldn’t be your sole objective. It’s just as important to consider nonfinancial aspects regarding what’s most important to you personally, and what you wish to do going forward.

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Comments regarding tax implications are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.

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For more information, contact Erich R. Holmes at 216-479-6876 or erich.holmes@truist.com.

Truist Wealth is a Goering Center sponsor, and the Goering Center is sharing this content as part of its monthly newsletter, which features member and sponsor articles.