Key questions to ask the family business owner who plans to sell

Know both the financial and emotional details to help your client have a successful sale.
By Patricia M. Annino, J.D.

As the many Baby Boomers who own family businesses contemplate retirement, CPA advisers will increasingly be called upon to help them craft exit strategies. Many owners decide to cash out: not to pass the business on, but rather to either sell their interest in it or sell it outright.

CPAs whose clients are thinking of selling their businesses should ask them certain key questions. They include:

  • What’s your time frame for selling? 

The longer the planning time is, the better the result is likely to be. Having ample time to consider the fate of the business gives the owner the opportunity to think through pitfalls and options.

  • Is this the right time to sell? 

Over the years I have seen owners who really want to sell but find that it makes no sense to do so because there is no way that they will make enough money off the sale to maintain their current standard of living. When that’s the case, the CPA should shift the terms of the discussion and help the owner improve his or her financial position so he or she can afford to sell. For example, maybe the exit process can take place gradually over a five-year window, with the owner taking more money of the company out each year and investing it so that outside net worth builds up. Or perhaps some of the assets in the company can be sold and cash removed.

  • Will you need to cash out in full or can you accept financing?

Cashing out in full is the most desirable solution for most owners, but not all buyers, especially if they are family members or key employees, can afford to pay in full. So, in many cases, the purchase will need to be at least partially financed. Any transactions should be structured so to give the owner enough of a down payment to protect himself or herself in case payments are slow or in default. Any financing should be secured. The adviser should also calculate the tax consequences of total purchase vs. installment sale to help the owner decide how to sell.

  • What would selling this business mean to you? To your family?

The sale of a family business is not just technically complex—it is a stressful, risky, and very emotional event. Often, a family business is the culmination of its owner’s life’s work. Selling it will bring about a change in his or her identity. It will also result in a lifestyle change for the family as often their entire lives revolve around the business and, when it is sold, family dynamics dramatically shift. Even if an owner’s determined to sell, he or she needs to think through the personal consequences of selling—both for himself or herself and the family.

Other good questions for advisers to ask in the initial stages of an exit planning discussion include:

  • Do you want to continue to work in the business?
  • When do you want to stop working?
  • What annual after-tax income will you need if you are not working?
  • What benefits and perks do you have as an owner (company car, cellphone, health insurance, computer, etc.)? How much do they add up to? Will you be able to manage once you are no longer an owner and cannot deduct them?
  • How important is it to you that your business remain a business in the same form after you cash out? Is the future of your business connected to your legacy in a way that will affect the decision to sell?

Other important questions a CPA should ask even if a sale is not imminent include:

  • If you were to sell the business right now who would be the right candidates? Who would not be good candidates? Why?

In my experience, the answers to these questions often change from year to year. So I create a “disaster plan” for my business-owner clients, which I update annually, recording their answers. That way, should the owner unexpectedly die, all the information and plans he or she carried in his or her head will not be lost.

  • How will the company be valued?

It is critical for the CPA and the client to have an honest discussion about what the business’s value is, how that value is determined, how it is substantiated, and what that value means in the marketplace (for example, is there a possible premium buyer out there: a competitor who could increase market share through acquisition, or a similar business in a different part of the country or world who would consider this an attractive opportunity to enter this market?). This ought to be a discussion with the client’s entire advisory team, including the corporate and estate planning attorney.

  • Are all your affairs in order?

Many clients do not have their corporate/business house in order. The exit planning stage is the time to make sure the corporate minutes are current; the by-laws and operating agreements are up-to-date, in place and signed; the stock ledger is up to date; and all leases are valid and current.

Advance planning with a CPA and other trusted advisers can enable a client to pay less tax and increase the value of his or her business through such steps as implementing noncompete retention packages for key employees and removing excess cash from the business. In other words, advance planning by the CPA and the client can position the business for a successful sale.

Patricia M. Annino, J.D., LL.M., a nationally recognized authority on estate planning and taxation, chairs the Estate Planning practice at Prince Lobel Tye LLP.


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