How to Know You’ll Have Enough After Your Business Sale 

“How much money do I need to take away from my business sale to never worry about my finances again?”  

As an owner, you’re probably asking yourself this question if you’re thinking you might sell your business one day. In fact, I’d say it’s one of the more important questions to answer well before you start the process. After all, this is likely to be the biggest financial transaction of your life, so it literally pays to get it right.  

The challenge often comes in translating a nebulous goal (never having to work again!) into a hard number you will put in the bank after an M&A transaction, enough to support you and your family for life. A word to the wise, that number is not the same as the headline price you may have seen when a competitor was acquired. From earnouts to tax treatment, a lot of factors come into play in determining how much you will actually take away at close and earn over the longer term.  

So how can you reach the point where money is the least of your concerns? You’ll need to plan well, run an effective deal process, and manage taxes and liquidity to ensure your finances hold up over time.  

Let’s start by looking at the work you’ll do with your wealth advisor. 

Building your number 

If I were advising you before a business sale, I’d start our session by examining your spending. I’d walk through your current lifestyle and how you’d like it to change once you have more liquidity. We’d cover recurring costs, major one-time purchases like a second home you may dream of, and what the business currently pays for that you’ll need to cover personally. 

We’d then work backward toward the after-tax, after-fee figure you want from a company sale. This figure would reflect expected inflation, your potential longevity, a sustainable withdrawal rate, and the assets you already hold outside the business. This number will inform the purchase price you target. 

From there, you’ll want to stress-test your lifestyle assumptions under three scenarios. How do your finances look if you get precisely the deal you envision? What happens if you get more than expected? And most importantly, what needs to change if the offers you receive are lower than you hoped for, or the purchase price is reduced during due diligence?  

This scenario-planning will help define your walk-away number, the lowest amount you can accept without making unreasonable financial compromises. When you know your price floor, you enter negotiations with clarity and can make confident decisions during what will likely be a complex deal process.  

Your number is not the purchase price 

As I alluded to earlier, the purchase price you agree to is not the net cash you’ll receive at closing, and it’s vital to project accurately to avoid an unpleasant surprise when actual proceeds are counted.  

First of all, as with any transaction (like selling a house), there are costs involved. Debt payoff and fees owed to your advisors come out of the proceeds.  

Deal structure will also determine how much cash you’ll see when the wire clears. For example, earnouts hold some portion of the proceeds back and pay out only if the business hits established performance targets on a quarterly, annual, or other basis. An instrument like rollover equity defers your up-front cash for continued stake in the company, the value of which could skyrocket, bottom out, or anything in between.  

Many M&A buyers insist on structuring deals in these ways to reduce their risk. There can be advantages for you as well, but you’ll want to work with your wealth advisor to understand the impacts under different scenarios.  

Perhaps the most misunderstood factor affecting after-transaction proceeds is the working capital peg. This is the amount of net working capital you agree to leave in the business at close. Fail to manage this number and you’ll have to make up the difference. I’ve witnessed cases where millions were deducted at close.  

To achieve your desired post-close number, you’ll need to collaborate with your whole team, including your M&A advisor, wealth manager, accountant, and attorney. For instance, when you evaluate bids, you may have to weigh the highest total price (with more contingencies, like an earnout) against more cash at close. Only you can decide if you’re willing to accept a lower amount with greater certainty, but your team can help you understand all the implications.  

At Class VI Family Office, we’re fortunate to work closely with the firm’s investment bankers. Competitive bid processes and M&A negotiations can change rapidly. It’s nice to be able to walk a few offices over and game out the alternatives together, so the client gets the full picture. 

And then there are taxes 

Tax law is a hugely complex subject, and I can’t cover all the nuances here. You may be subject to long-term capital gains tax, ordinary income tax on certain assets, depreciation recapture tax, and various state taxes, depending on where the business operates.  

The way your company is set up also matters. The same $50M sale can produce very different tax bills depending on the legal form of your business (S-corp, C-corp, LLC, etc.).  

You’ll need to consult with your wealth advisor and CPA to understand the potential tax burden after the sale. And you should loop in your M&A advisors to help you negotiate your preferred deal terms from a tax perspective.  

Knowing what you want from your life comes first 

Defining the amount you need to earn from a business sale involves a lot of financial figuring, but it all starts with your vision of the life you want to lead. No matter where you are in your journey, you can start outlining your lifestyle priorities. Once you’re actively planning to take your company to market, sit down with a wealth advisor (ideally 12 to 24 months ahead of time) to dig into the specifics, and bring in your M&A advisor early as well to build the deal with your number in mind.  

Helping entrepreneurs define their number is some of the most fun work we do at Class VI Family Office. I hope you’re excited to start the process yourself!