2 Big Challenges to Selling your Business

challenges to selling your businessIt has been a busy year in M&A as interest rates remain low fueling the capital availability to get deals done. Here at Legacy Partners, we have been extraordinarily busy creating and executing exit plans for privately held business owners. In fact, we just closed a deal in the building automation sector and of course, there were a few big challenges to selling your business and getting the deal over the finish line.

There is always a moment or two of panic that the deal will fall apart. Our valuation process highlights any red flags that can throw off the due diligence process so that we can correct any issues well in advance, but as Rosanna Roseannadanna used to say, “Well, Jane. It just goes to show ya! It’s always somethin’!”

The deal we just closed was for a client whose Master Exit Plan (MEP) has identified a sale to a third party as his optimal exit strategy and he was perfectly positioned to execute and go to market. The deal made him very happy and wealthy, but there is always somethin’ – so what were the main challenges to selling his business and how did we overcome them?

Challenge #1 to Selling the Business – Identifying the Buyer

One of the greatest fears for a business owner is that they will be taken advantage by a buyer and won’t get the best price or terms.

This is a very healthy fear.

Make no mistake, many buyers do want to steal your company. Buyers are going direct, and I bet you possibly received a call from a private equity group or a strategic buyer. Our client received a call from a strategic buyer’s representative, and he made the mistake of engaging directly with this buyer. He received a low-ball offer, the deal never went anywhere, and he wasted a great deal of time. This was before he had been referred to us by his very astute wealth manager who knew he was treading in deep waters.

As a privately held business owner you most likely don’t know all of the buyers currently active in your sector. You are an expert in your industry but lack the necessary M&A expertise to sell your business. And trust me you do not have the time to go through this process on your own while running your business!

This strategic buyer that was pursuing a deal with our client was included in our buyer pool when we went to market and they did engage in the process, that is until they understood there was competition and determined they would not succeed in landing what we call a proprietary deal. They politely bowed out.


We started the process with 23 buyers in the buyer pool who received the Confidential Business Profile (CBP). Distribution of the Confidential Information Memorandum (CIM) and buyer meetings narrowed the field to 6 buyers: 3 strategic buyers, 1 being a public company, and 3 private equity groups.

Our client signed the Letter of Intent (LOI) and moved through due diligence with a PEG who has a national presence and is expanding globally providing immense opportunity for our client and his team. The terms include an equity role in which the stock has the potential of a minimum 3X return which defers our client’s tax obligation today and provides another bite of the apple for him down the road. Our client also wasn’t quite ready to stop working so we negotiated a three-year employment agreement.

A concern for many owners upon selling is that the corporate culture that they have carefully developed in their business continue under new ownership. We help guide our clients in assessing corporate culture to ensure it is a good fit for them and their employees. As Peter Drucker used to say, “Culture eats strategy for breakfast” It’s important! In this case our client will continue working in his current capacity affording him the autonomy he wanted to carefully integrate his company into the new organization which will offer immense growth opportunities for his team.

When you receive your offers in the form of a Letter of Intent (LOI) your deal team will negotiate the points in the deal that are important to you, and this will guide you as to which buyer best meets your goals. The focus tends to be on price, but remember the terms matter too.

Challenge #2 to Selling the Business: Price and Taxes Due to Uncle Sam

Is it a good price or not? You cannot possibly evaluate offers, or even make the decision to sell your business, without first understanding its value. Every Master Exit Plan (MEP) begins with a valuation of the business for M&A purposes, so that the owner understands the market value and are not making the decision to sell the business in a vacuum! It is also critical that the value of the business be integrated into your personal financial plan so that you understand the impact of a liquidity event on your future financial position.

Our valuation process is robust and has proven to accurately reflect market value, and in our client’s case, the offer came in at value. The final price of course moved up during negotiations, so, what was the big hurdle on this deal?


Nobody is anxious to pay that silent partner of ours, the IRS. The structure of our client’s deal was a stock sale, which is taxed at capital gains – terrific. Lower than ordinary income tax, but – hold on – the structure also included a 338 (h) (10) election.

If you are an S-Corp it is very likely the buyer will want the structure to be treated as a stock sale for legal purposes and as an asset sale for tax purposes, which affords the buyer a step-up in basis and the ability to increase depreciation which increases their after-tax cash flow to fuel growth.

The issue for the seller is that for tax purposes, under an asset sale structure the proceeds will be allocated to each individual asset purchased and asset classes held for less than a year (inventory, accounts receivable) are taxed at ordinary income tax rates, so the seller takes a tax hit with this election. Note that goodwill is taxed at the capital gains rate. This 338 election was a very, big, million-dollar-plus hurdle.

What made the issue worse was our client had a CPA, who has an ego the size of Texas, was advising him not to sell. Please recognize that when you sell your business, your CPA will most likely lose you as a client. And with baby boomers now selling their businesses en masse, CPAs can be a bit prickly as they face this headwind of losing clients. Not all CPAs mind you…but some, oy.

It's Always Somethin'!


Our team negotiated the structure sans the 338 (h) (10) election by calculating the depreciation benefit to the buyer and pointing out it was not worth losing the deal over. Our client was thrilled putting over a million dollars more into his pocket.

The market value range in this industry is currently 3-5X adjusted EBITDA and we ended up with a 5.25X cash deal, plus stock, and an employment agreement. The employment agreement was also rigorously negotiated upward by 27% to ensure our client would be paid market rate for his expanding role in the organization. The final deal value when the equity position is realized will be closer to a 6.5X multiple!

On another note, going back to the exit strategy and identifying which type of buyer would be optimal to meet our client’s goals, as we were negotiating, our client was hanging his hat on a backup plan to sell to his top 3 employees if the deal didn’t go through. As the deal was nearing the close, he met with these employees to explain the sale and all three told him they were no longer interested in buying the business and were excited about the growth potential with the buyer. If our client had listened to his CPA and walked, it would have been the worse financial decision in his life.

Are you making decisions about your exit plan with outdated assumptions and in a vacuum with no understanding of value or with a team to engage with buyers and guide you through the selling process? We’re here to help guide you through the challenges of selling your business.

Keep reading:

An Exit Strategy is Good Business Strategy – Why You Need a Plan Today!

An exit plan aligns an owner’s business, financial, and personal goals and is a living document, so it is continuously revised as the business scales. It serves as a guide for the business owner as they prioritize critical decisions to scale the company. This ensures that as the company grows transferable value is increased and the business will attract investors when they go to market.

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