The content in this article was originally presented via a Lathrop GPM webinar. You can access the recording here.
Selling a closely held business is a major milestone. Whether the goal is retirement, estate planning or strategic growth, early preparation can help business owners protect value, avoid delays and position the company for a successful transaction. With deal activity on the rise and buyers becoming more selective, owners who plan ahead are better equipped to navigate the process and achieve favorable outcomes.
What’s Happening in the Market?
Private equity firms and corporate buyers are actively pursuing acquisitions. Private equity alone holds more than $1.5 trillion in uninvested capital, and corporate buyers have nearly $6 trillion in cash on hand. Although interest rates remain high, buyers are relying less on debt and more on equity, which has helped keep deal activity strong.
Still, market conditions are fluid. Tariff announcements and trade policy shifts can quickly affect valuations. Owners who wait too long to prepare may miss opportunities or face unexpected challenges.
Why Preparation Matters
Buyers will examine every aspect of a business before closing a deal. That includes legal documents, financial statements, employee agreements and ownership of key assets. Sellers who take time to clean up these areas in advance can avoid delays and reduce the risk of price reductions during due diligence.
Additionally, preparation benefits the business even if a sale doesn’t happen. Many of the steps outlined below also strengthen succession planning and reduce liability.
Action Steps
Review corporate and financial hygiene
Start by confirming that ownership documents, corporate records, intellectual property registrations, licenses, leases and insurance policies are current and complete. Employment agreements should be in place and enforceable, especially non-solicitation clauses. Deferred compensation plans must comply with IRS rules, and employee manuals should be up-to-date to reduce employment-related risks.
Financial statements should reflect the true earnings potential of the business. Normalize owner salaries and personal expenses, and consider obtaining audited financials and a quality-of-earnings report before marketing the company. Buyers will use these reports to validate EBITDA (“earnings before interest, taxes, depreciation and amortization”) and may adjust their offer if earnings appear lower than expected.
Plan ahead for estate and tax implications
Pre-sale estate planning can significantly reduce estate tax exposure. Gifting or selling minority interests in the business to trusts before a sale allows owners to take advantage of valuation discounts. Once the business is sold and converted to cash, those opportunities diminish.
Sellers should also consider charitable planning and potential trust planning if the shares satisfy the requirements for Qualified Small Business Stock. Timing is critical – these strategies must be implemented well before a sale is imminent to be effective.
Build a strong internal and external team
Buyers want to know that the business can thrive without its founder. A strong management team – led by a capable CEO, controller and sales force – adds credibility and value. Internally, this signals stability. Externally, assembling a trusted advisory team is just as important. An investment banker, wealth manager, accountant and legal counsel each play a critical role in preparing the company, structuring the deal and guiding the owner through the sale.
Resolve liabilities and clarify ownership
Unresolved legal issues can delay or derail a sale. Buyers will uncover litigation, regulatory gaps or franchise compliance problems during due diligence. Ownership of key assets like software must also be clearly documented. If the business relies on assets it doesn’t fully own, buyers may reduce their offer or walk away. A pre-sale review can help identify and resolve these issues before they become obstacles.
Structure the deal carefully
Deal structure affects both tax liability and net proceeds. Asset sales are common but may trigger higher taxes for sellers. Stock sales or reorganizations can offer more favorable treatment, especially in states without income tax. Purchase price allocation also matters – buyers prefer deductions; sellers prefer capital gains. Residency planning may reduce state taxes but must be done well in advance to withstand audit scrutiny.
Consider incentive plans if delaying a sale
Owners who plan to grow the business before selling may need to attract and retain top talent. Equity-flavored incentives like stock appreciation rights and phantom stock plans reward employees for increasing company value without giving up ownership. These plans are typically tax-deductible and align employee interests with long-term performance, helping drive growth ahead of a future sale.
What This May Mean for You
If you are thinking about selling your business, start preparing now. Addressing legal, financial and operational issues early can increase your company’s value, reduce risks and ensure a smoother transaction. If you have questions regarding the sale of your business, please reach out to Scott Malin or Steve Kutscheid, or your regular Lathrop GPM attorney.
Lathrop GPM has a long history of representing closely held and family-owned businesses through every stage of growth and transition. To support these clients, the firm established the Closely Held Business Institute, which provides educational resources and legal guidance tailored to the unique needs of privately owned companies. Learn more about our approach and services here.