A business exit strategy is the plan for your business at the time that you want to leave your business. Giving yourself time to plan your exit will allow you to take the most advantageous approach. It is ideal for you to leave you business under the terms that you desire. Selecting the right strategy requires a careful assessment of what you want from the sale of your business and who can best give it to you. An exit strategy can be determined with the help of your accountant and other advisors part of your business team. These are few questions you may want to ask yourself:
- How will you make money when you exit your business?
- How much longer do I want to be actively involved in the business?
- Do I know what my business is worth on the market?
- Are my records ready?
- What should I be doing know to minimize future tax liabilities?
There are several ways to leave your business and the more you understand your option, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here’s are some things you should know:
In a liquidation the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, close shop, and keep what’s left, if anything, for themselves. The primary reason liquidation is considered as an exit plan is that a business lacks sufficient income-producing capacity apart from the owner’s direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets. Service businesses in particular are thought to have little value when the owner leaves the business. Since most service businesses have little “hard value” other than accounts receivable, liquidation produces the smallest return for the owner’s lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last-ditch method to fund their retirement.
Transfer of Ownership to Your Family
Many business owners dream of passing their business want to their family. There are advantages that are worth considering. For example, transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date. At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it’s transferred to a family member who can’t or won’t run it properly. It is ideal for the business to have a formal family succession plan in place. Consider these tips to begin plan for a successful succession:
- start planning early- at least 5 years in advance
- involve family members in identifying goals
- take into consideration the skills of family members
- train your successor(s)
- seek the assistance of your accountant, lawyers, and other advisors to put together a formal plan
- determine best business structure for transfer
Sell It to A Third Party
While a sale to a third party too often becomes a bargain sale – and sometimes the only alternative to liquidation – this option just might be your best way to cash out if the business is well prepared for sale. Although many owners don’t realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third-party sale is immediate cash or at least a substantial up-front portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well. This may be the best option for a business that is too valuable to be purchased by anyone other than someone who has access to a considerable source of money. If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing.
Employee Stock Option Plans (ESOP)
If your family has no interest or are unable to take over your business, there’s another option to ensure the continued success of your business: The Employee Stock Ownership Plan (ESOP). ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There’s one important difference however; the majority (more than half) of their investment must be derived from their own company stock.
Whether it’s due to lack of interest on your family’s part, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees have a vested interest in your company?
ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax free until distribution. If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.
If you need assistance figuring out which exit strategy is best for you and your business, contact us. The sooner you start planning, the easier it will be.