You’ve started and grown your business, despite all the hurdles you had to overcome. It may be difficult to think about a time when you will transition out of that business; however, succession planning should start at least five years before you want to leave your company. If you put off your exit strategy until you’re ready to get out, you may seriously limit your options, including who you can sell to, the value you will receive and how successful the transition is. You can also expect that your succession plan will need to be adapted because of circumstances that are beyond your control, such as health problems, life changes, key employee departures, market conditions and interest in your company by intended successors. In the meantime, there are tax minimization moves you can make.
The following six options are what you’ll typically find available when you’re ready to transition away from your business.
1) Pass Ownership onto Family
You’ve built a legacy, and now you’re ready to pass it on to a younger sibling or the next generation of your family. This is often an entrepreneur’s dream, providing for his or her family for generations into the future. However, it may not be your kids’ dream, and they could have no interest in taking the business over. Though you have the option of providing them with the business as a gift, doing so does not deliver many or perhaps any proceeds to you at the time, which can limit your retirement income if you haven’t made other arrangements.
2) Sell to Key Employee(s)
Another option is selling your company to a key employee who is already experienced with your business. This is an attractive option if you have good relationships with key employees and want to maintain the current culture. However, many employees will have limits to their financial resources or may not have the business acumen to be a good entrepreneur. You’ll spend time training the employee and may have to finance the deal personally or through your business due to difficulty with bank financing. Is this risk one you’re willing to take on?
3) Sell to an Outside Individual
Although selling to an outside party can provide you with a great value, the opportunities to do so may be limited, especially in industries that are not seeing rapid growth. It can be difficult to vet the potential buyer(s), so you will likely need an investment banker. Settling for only one buyer in the process limits your sales options.
4) Take a Merger with Another Company
While merging with a competitor or selling to a private equity group can also provide a good price, you’ll need to market your company to potential buyers that want your territory, key employees, customer relationships, technology or other assets.
5) Add an Employee Stock Ownership Plan (ESOP)
To get a fair price while keeping your business going as-is, an ESOP can facilitate your transition, but there can be issues with acquiring debt financing. For an ESOP, the outgoing owner(s) is not always willing to give a personal guarantee, though it is frequently required by some banks. Assuming an ESOP can be facilitated, is your management team ready to run the company?
6) Sell Your Assets and Liquidate
While this is often the easiest way to get out of a business, it also provides the lowest value for the owner. This involves selling off equipment, assets and real estate; collecting your receivables; and paying off any liabilities.
We’re Here to Help
There are many factors to consider when determining which transition option is best for you. Our experienced team of business advisors is here to create a solid plan for the succession of your business, while considering current and future tax minimization plans. For more information, please contact Gina Miller or Brett Dixon by calling 770.396.2200.
