Exiting or selling your business is a complex process that requires careful consideration.

The financial returns loom large and there are a vast amount of personal implications to consider as well. While it may be a daunting endeavor, a business exit can be an opportunity for you to build generational wealth for your family, pursue new business ventures, achieve a great work-life balance, and more.

Pennington works with many entrepreneurs who have either sold businesses in the past or may consider a sale in the future. There are a myriad of best practices for business owners to consider and adopt prior to an exit, and this whitepaper highlights the most important ones, based on our experience working with successfully exited entrepreneurs.

1. Reduce your tax burden through income and estate tax minimization strategies.

There are numerous strategies that may enable you to reduce the tax burden of your exit and thus, maximize your gains. These include estate planning strategies such as:

• Family limited partnerships and grantor annuity trusts (GRATs), or a combination of the two, which allow for the transfer of appreciated assets to other family members at a low tax basis.

• A change in personal residency, as there are numerous states that have very low or no taxes. – A change in corporate structure from a flow-through entity to a C Corp or vice versa.

• Employing rollovers and exclusions, such as Section 1202 treatment, which provides investors an opportunity to exclude some or all of the gain realized from the sale of qualified small business stock (QSBS) held for more than five years.

• Reinvesting the gains in an Opportunity Zone Fund or an Opportunity Zone Business, which would allow for deferral of the gain on sale as well as tax free treatment on the new investment if held for 10 years.

• Specialized investment strategies that accelerate capital losses or ordinary income losses to shelter or protect income.

2. Partner with an investment banker to maximize your business valuation.

Hiring an investment banker with knowledge and experience in the sector will help to drive a professional but competitive sale process. There are numerous options for an exit that need to be considered, including:

• Sale to employees through an ESOP

• Sale to a strategic buyer

• Partial or majority sale to a private equity investor

• An IPO

• A debt-financed recapitalization that can lower cost of capital and allow owners to retain control.

Selecting the right investment banker and aligning and negotiating the right terms can be overwhelming. In our experience working with exited founders, many described partnering with an investment banker as…