Why Advance Planning is the Key to a Successful Exit
A successful merger or acquisition isn’t just about getting the right price—it’s about executing a strategy that protects long-term wealth, minimizes tax exposure, and supports a fulfilling life after the sale. The difference between a smooth and rewarding transaction and one that breeds regret often comes down to one key factor: early and thorough planning and preparation.
Once a letter of intent is in hand, the clock starts ticking. Many advanced strategies are off the table, and business owners may find themselves trying to retrofit planning, laying tracks directly in front of the train.
Starting estate, tax, and exit planning well before initiating an M&A transaction yields significant strategic advantages. Many tax-saving opportunities, including gifting interests in the business or creating trusts, are most effective when implemented at lower valuations.
How, then, should a business owner prepare for an M&A transaction? This past spring, the first annual CriticalPoint Business Summit brought business owners together with industry specialists to explore and shed light on the M&A process. Nick Cipiti, a Managing Director at CriticalPoint, moderated a session titled “Preparing Yourself for a Transaction: Tax & Estate Planning”. Read on for insights gleaned from this panel discussion, comprised of two Wealth Managers, a Senior Tax Advisor, and a Managing Director.
1. Build A Strategic Advisory Team
- A wealth advisor who can lead the implementation of the post-sale financial strategy.
- A transaction attorney who can structure and negotiate legal terms.
- A CPA who can model tax impacts and manage compliance.
- An investment banker who can identify and negotiate with buyers.
This team will need to be strategically aligned and fully engaged throughout the M&A process. Your wealth advisor, in particular, should play a crucial role in helping orchestrate the financial transition, ensuring that tax planning, investment strategy, and estate considerations are aligned with the deal itself.
Trust is as important as expertise. Your advisors should be people with whom you can be completely candid, and who are willing to both challenge and champion your vision. At the CriticalPoint Business Summit, a panelist, who is also a Wealth Manager advised entrepreneurs to build relationships early, focus on trust and chemistry, and understand the full depth of resources behind the primary advisor. Another experienced Wealth Manager pointed out the prevalence of “deal fatigue” and the need for a wealth advisor to manage the implementation and coordination of complex personal financial strategies during a transaction.
2. Clearly Define Your Goals and Objectives
- After a deal, what income will I need to maintain my desired lifestyle?
- What legacy do I want to leave for my family, employees, or community?
- What personal or philanthropic goals do I want to pursue?
Answering these questions clearly will help inform every aspect of your transaction and post-transaction planning. At the Summit, a Wealth Manager also noted that entrepreneurs often overlook the personal financial implications of M&A deals. She emphasized the importance of defining and achieving individual and family goals in a tax-efficient manner. Another panelist, who was also a Wealth Manager, echoed this, explaining that defining “core capital”—the amount needed to sustain one’s lifestyle—is crucial to determining if a deal truly meets personal needs.
3. Explore Tax Implications and Minimization Strategies
- Trust planning: Gifting business interests to irrevocable trusts or charitable entities prior to sale can remove significant appreciation.
- Qualified Small Business Stock: QSBS can offer capital gains exclusions for companies that meet specific criteria.
- State tax residency: Some business owners choose to relocate before a sale to take advantage of a more favorable tax environment. However, this type of strategy requires careful timing and legal considerations.
Developing a tax plan early allows you and your team to thoroughly vet and implement every strategy, ensuring it aligns with your broader goals. At the Summit, a Wealth Advisor cited a case study where early gifting of business interests to a trust significantly reduced estate taxes upon sale. She also discussed using donor-advised funds for charitable giving to achieve tax deductions in the year of the transaction. The Managing Director further emphasized the importance of starting planning years in advance, ideally in a separate calendar year from the transaction, to allow for education on complex tax-saving strategies and to leverage lower valuations for gifting.
4. Consider Your Post-Transaction Life
Selling a business often means a profound emotional transition. The business may have been a source of identity, purpose, and community. When that era ends, it’s common to experience a sense of loss or uncertainty mixed in with the sense of achievement. At the Summit, a panelist compared it to parting with a limb and stressed the importance of planning for post-transaction life.
- New pursuits, from travel and philanthropy to mentorship or launching your next venture.
- Investing more time in family, friends, and your community.
- Focusing time and effort in your own health and wellness.
These might seem like incidental considerations, but thinking in advance about your post-transaction life is key to feeling fulfilled after a sale. At the Summit, one Senior Tax Advisor, with over 30 years of experience, noted that individuals’ tax structures would shift from business income to securities income, requiring new tax strategies. The Managing Director warned against pitfalls such as over-planning for estate taxes and over-allocating rolled equity, emphasizing the need for conservative core capital definition.
5. Avoid Financial Management Pitfalls
- Determining the income amount needed to support your lifestyle, using conservative assumptions for longevity, inflation, and investment returns.
- Resisting impulse spending. A large liquidity event can tempt even the most disciplined individuals to overspend or overcommit too early.
- Aligning asset allocation with your goals and risk tolerance. Work with your wealth advisor to design a portfolio that balances growth with income and protection.
Final Thought
An M&A transaction isn’t just a financial event; it’s a defining moment in a business owner’s life. Early planning, a trusted and qualified advisory team, clear personal goals, and thoughtful execution will help you navigate that critical point with confidence and precision.
To learn how CriticalPoint can help your business, please contact us.
Managing Director, Business Development
About CriticalPoint
CriticalPoint provides tailored financial solutions through a trusted platform, combining the best of Investment Banking and Private Capital. Backed by decades of diverse transaction experience, the CriticalPoint team delivers the insights clients and stakeholders need to achieve superior outcomes. Founded in 2012 by senior M&A professionals with a passion for deal-making, CriticalPoint stands out for its deep expertise in Investment Banking—including mergers and acquisitions, capital markets, deal sourcing, special situations, and valuation advisory—as well as in Private Capital investing, with a focus on corporate divestitures and special situations. When business owners, management teams, private equity firms, and corporate sellers reach a defining moment across a range of industries, they rely on CriticalPoint’s proven expertise.
