Authored By: Patrick Guthrie, CFA
Pre-sale planning is essential for private business owners who want to maximize valuation, enhance marketability, and reduce tax liabilities before selling their business. A well-timed transfer of ownership interests—such as gifting shares to a trust—can help minimize taxes while preserving future gains. Understanding key transaction milestones ensures a smoother sale and stronger financial outcome.
Why Valuation Matters in Pre-Sale Planning
One of the biggest challenges in this process is determining the fair market value (FMV) of shares before a sale. The valuation must consider two possible outcomes:
- If the sale does not close: The transferee holds a minority, illiquid interest in the company.
- If the sale does close: The transferee receives their pro rata share of the proceeds.
To address this, valuations weigh both the probability of success (POS) of the deal closing and the marketability of the ownership interest. As the company moves through key transaction milestones, these factors evolve.
Key Transaction Milestones and Their Impact on Valuation
The POS and marketability of minority ownership interests change as a business progresses through a sale process:
- Initial Banker Talks: Informal discussions with investment bankers have minimal impact on POS or marketability.
- Engagement of Investment Banker: The formal sale process begins, increasing POS and slightly improving marketability.
- Roadshow to Buyers: As offering materials are circulated, buyer interest grows, further boosting POS and marketability.
- Indications of Interest (IOIs): Preliminary offers from buyers provide external validation, strengthening both POS and marketability.
- Letter of Intent (LOI): A buyer is selected, and due diligence starts. This milestone marks a significant jump in both POS and marketability.
- Sale Negotiation: The deal structure and price are finalized, aligning FMV with POS. While minority interests would reflect the marketability of a likely sale, some minor discounts may still apply due to any remaining risk of failure at this stage.
- Closing: The transaction is finalized, eliminating any marketability discount.
The Value of Early Planning
Transferring ownership early in the exit planning process allows business owners to take advantage of valuation discounts due to a lack of control and marketability. As the sale progresses, these discounts diminish, and FMV moves closer to the sale price. By acting ahead of key milestones, owners can lock in lower transfer values, achieving tax-efficient wealth transfers with minimal downside risk if the sale does not close.
Aligning Tax Strategy with Valuation
A well-executed pre-sale business plan integrates tax strategies with valuation realities, helping business owners navigate uncertainty while achieving their wealth transfer goals. To learn more about business valuation strategies, check out our articles on current trends in early-stage valuations and valuation stages and methods for startups.
If you’re considering a business sale, Evergreen Advisors can help you assess valuation options and structure a tax-efficient transfer strategy. Contact us today to get started.
