When a business owner decides to sell, almost all the attention goes to the deal itself. Valuation, buyers, deal structure, closing. By the time a letter of intent is signed, a lot of the financial decisions that matter most have already been made or missed. An attorney recently shared with me that he had a client selling a $40,000,000+ business and didn’t have an advisor or a plan on what to do with the proceeds. There is important work that happens before the sale, during the sale process and after the sale. Below are the questions we hear most often from business owners and their advisors, answered the same way we would explain them across the table. This reflects how we actually run this process at Flagstone Financial Management.
What does a financial advisor actually do during a business sale?
A financial advisor’s job during a business sale is to get the owner’s personal financial life ready, not just the transaction. The deal transaction itself is often handled by the deal team (attorney, banker/broker, and CPA). Ours is making sure to coordinate all the relevant parties and make sure the owner is personally ready for the sale, optimizes the value in advance of any agreement to sell and knows how the proceeds will impact their financial situation and how to manage the sale proceeds and life after the sale.
What is a Business Transition Readiness Review?
At Flagstone, our first step in the process of helping business owners is our Business Transition Readiness Review, which is a structured process that prepares a business owner and their business for a future sale or transition. It combines a review of the business itself with personal financial planning, so the owner arrives at closing prepared rather than scrambling. The process includes six steps.
- Discovery interviews. We establish goals, timeline, and the personal stakes behind the transition before anyone touches a document. A summary is shared with the client’s other advisors, so everyone works from the same foundation.
- Leadership team assessment. Where appropriate, we evaluate key employees to identify strengths, gaps, and what the business looks like to a prospective buyer. This is often more relevant in an internal transition, but there are ways it can add value if the goal is to sell to an external purchaser.
- Business financial review. Three years of financials, entity structure, buy-sell agreements, and succession documents are reviewed and organized. We work directly with CPAs and attorneys to ensure accuracy and flag issues early.
- Business valuation estimate. We utilize a third-party valuation software to get a valuation estimate which provides a starting point for realistic planning. This is not a certified appraisal, but it does do a good job at estimating value and highlights possible areas to increase value prior to sale. We collaborate with the client’s CPA on EBITDA adjustments and normalization.
- Pre-sale issue list. Legal, structural, and financial items are surfaced early, while there is still time to act, developed in close coordination with transaction attorneys and CPAs.
- Personal financial plan creation. Lifetime income projections, tax planning, insurance, and estate and charitable strategy are built around what the sale proceeds need to accomplish. We coordinate with the client’s CPA and estate planning attorney as appropriate, but this is a central piece of our work to optimize the transaction based on your goals and tax situations.
Why does a business owner need a personal financial plan before selling, not after?
Once the Letter of Intent or Purchase Agreement is signed, most of your flexibility is gone. Deal structure, timing, charitable giving, entity choice, these are all easier to shape while there is still room to negotiate. We have seen owners leave real money on the table simply because a tax or estate conversation happened after closing instead of before it. Plan first, sign second.
Who is involved in a business transition planning team?
A well-run business transition typically involves four professionals working together: the CPA, the transaction attorney, the business broker or investment banker, and the financial planner (there are other professionals that might be needed, depending on the deal and owner’s needs). Each has a distinct role. The CPA handles tax positioning and financial statement accuracy. The attorney handles legal structure and deal documents. The broker/investment banker manages the sale process and buyer search. The financial planner coordinates the owner’s personal financial readiness and makes sure the other three are working with the same information. At Flagstone, we describe our role as collaborating and leading where appropriate, including following the lead of the other advisors when that is what best serves the client.
What is a leadership team assessment, and why does it matter in a sale?
A leadership team assessment is a structured evaluation of a business’s key employees, done to identify strengths, gaps, and how the management team looks to a prospective buyer. Buyers pay close attention to whether a business depends too heavily on the owner or has a capable team that can operate independently. Identifying and addressing those gaps before going to market can materially affect both the sale price and the pool of interested buyers. In an internal transition, it is important to give the business the best opportunity to succeed going forward. This team assessment helps identify the pieces necessary for the new management team and business to succeed long after the owner’s exit. Many deals have some element of owner financing as well, so the business’ sustained success is also important to the seller.
What is a pre-sale issue list?
A pre-sale issue list is a compiled set of legal, structural, and financial items that need to be resolved before a business goes to market. Outdated buy-sell agreements, unclear entity structure, unresolved contracts, etc. can slow down or derail a deal if they surface during buyer due diligence instead of being addressed in advance. Surfacing them early, while there is time to fix them, is one of the most valuable things a planning team can do for a selling owner.
Does a financial advisor’s compensation create a conflict of interest during a business sale?
It can, depending on how the advisor is paid. Advisors who earn commissions or receive compensation for referring clients to certain products or investments have an incentive that may not align fully with the client’s best interest. Flagstone is a fee-only, SEC-registered investment adviser. We earn no commissions and sell no products, which means we have no financial reason to steer a client’s transition process in any direction. Our fees are described in our Form ADV Part 2, available upon request.
What happens after the business sale closes?
After closing, the focus shifts from transaction planning to retirement and legacy planning. At Flagstone, this is our Phase 3, called Life After the Sale. The client moves into our retiree planning practice, where the work centers on managing the proceeds for lifetime income, tax efficiency, estate and legacy planning, and charitable goals. The relationship with the client and their professionals continues, but we simply shift how we are adding value and advising the client.
How long does the business transition planning process take?
The Business Transition Readiness Review itself is typically a two-to-three-month engagement, but it is very deal dependent. It is followed by Phase 2, Transition Coordination, where we stay alongside the client and their advisory team through the actual sale process, and Phase 3, Life After the Sale, which begins at closing and continues indefinitely as part of our retiree planning practice.
What is the deliverable at the end of the Readiness Review?
The end result is a written Readiness Review Report, presented jointly to the client and their full advisory team, including the attorney, CPA, broker, and financial planner. Because everyone reviews the same document at the same time, the client’s entire advisory team leaves with the same priorities and next steps, rather than each advisor working from a different picture of where things stand. Every Readiness Review Report will be unique and customized to the client’s situation. This article is intended for informational purposes only and does not constitute legal, tax, or investment advice. Flagstone Financial Management, LLC is a fee-only, SEC-registered investment adviser. Registration does not imply a certain level of skill or training. A copy of our current Form ADV Part 2 is available upon request. Business owners considering a sale should consult their own legal and tax counsel.