As a small business owner, much of your wealth and retirement planning likely hinge on the successful disposition of your business. But not all exit plans are the same.
As a financial advisor for entrepreneurs here in Utah, I’ve helped many clients plan for retirement and create an exit plan that works for them. After much hard work, some clients decide to cash in by selling their business, in whole or in part. Other clients choose to pass on their business to family members or close friends.
In this article, we’ll look at 5 different strategies and the accompanying concerns, considerations, assumptions and misconceptions of each.
An Outright Sale of the Business
The most straightforward way to exit a company is to sell it outright. This can be a good strategy when there are no family members or partners who can or want to run the company after you leave. You accomplish the sale by selling the ownership rights of the company for cash or some other consideration.
When you sell the entire business, the buyer is exposed to all the potential problems – unless special provisions are made in the sales agreement that segregate problem areas. For example, the sale might be preconditioned on the paydown of existing long-term debt. An outright sale is typically easiest when the buyers are the existing managers who want to maintain the business. This saves the time and effort required to line up an outside buyer, even if it means you may not get absolute top dollar for the company.
Alternatively, you might be positioned to sell the company to employees through an Employee Stock Ownership Plan (ESOP). This method can be complex and requires years of pre-planning, as you must establish an independent trust to run the ESOP and hold the workers’ shares, as well as use an independent evaluator to set the stock’s fair market value. Some owners balk at letting a third-person entity determine the stock price, because that price might be lower than what can be obtained on the open market.
Regardless of how you sell your business, there are some common misconceptions you will have to address, including:
- Ease of sale: You might be proud of the fact that you’ve built a good business, but that doesn’t guarantee the sale will be quick and easy. On average, it takes 7 to 12 months, comprising several rounds of negotiations, to sell a business. It may take longer if you haven’t carefully planned your exit strategy, or if you have unrealistic expectations about the price you’ll receive.
- Price of sale: Unlike real estate comparable sales, you really can’t compare the sale price that another company received to what you’ll get. A lot depends on market conditions that may have changed since the other company was sold.
- Price is everything: Yes, price is important, but don’t underestimate all the other terms you will need to settle before finalizing the sale. Those other terms, such as retention of workforce or changes in structure, might significantly impact the final sale price.
- You can sell the business on your own: Sometimes you can; sometimes you can’t. Ultimately, a successful sale depends on how well you’ve prepared the company. Even with a broker, you should expect to devote much of your time to facilitating the transaction while making sure your business continues to be attractive to a buyer.
- Selling to an employee or family member is easy: Perhaps this will be true, but remember that the person you are counting on to buy the business may change their mind when the time comes. For example, a possible buyer might not feel comfortable raising the amount of debt needed to buy the company.
Talk with a financial advisor who specializes in helping entrepreneurs plan for retirement. Understanding your options and planning for different outcomes can help you navigate the transition easier.
Have questions about your exit plan? Contact the financial advisors at Rock House Financial to see how we can help.
A Partial Sale of the Business
Some business owners decide to sell only part of their business, by selling off some of their shares in the company. If you no longer want to run the company but do want to benefit from the company’s future growth, you might sell off majority interest to a buyer. On the other hand, you can sell off a minority interest if you simply want to raise cash. This strategy can be problematic though, unless the buyer agrees to be a silent partner, otherwise you may find yourself having to justify all your decisions with your junior partners. In either case, if you continue to hold shares, you can’t really divorce yourself from the company’s future activities if you feel they will hurt the value of your remaining shares.
A Sale of Only the Business Assets
Selling only the business assets can be a good strategy for buyers, because they are getting tangible and intangible assets without being exposed to prior claims against the company. The seller might benefit if the sale of the assets individually will bring in more money than the sale of the company as a whole. It also may be easier to sell the assets separately to multiple buyers rather than depending on a single buyer for the whole company. The sale of only certain assets allows the owner to continue to run a smaller company.
Leaving Your Business in Your Will
Many businesses are left to someone in a will. This is a perfectly reasonable way to transfer a company to someone else, but make sure your estate plan is properly specified in advance. Properly handling this transfer of ownership upon the owner’s death can avoid the involvement of probate court with its attendant delays and costs. You will need to plan the impact of bequeathing your business on your estate and/or inheritance tax exposure, which can be as high as 40 percent. The will must also carefully lay out the succession plans for the company to lessen confusion reign after the owner’s passing. This strategy can make sense when you don’t need to live on the proceeds of the business’ sale.
Giving Your Business to Family/Business Partners/Etc.
You can simply give the business to a trusted person, such as a family member or business partner. This might be a good choice if your business is saddled with a lot of debt, back taxes or legal issues. You will have to pay gift taxes on the value of the business that exceeds your remaining lifetime exemption. However, you are freed from any capital gains tax liabilities. This is another viable strategy for company owners who do not need to rely on sale proceeds to fund their retirements.
Why You Should Discuss Your Plans with a Financial Advisor
Whichever method you select to pass on your company, it’s wise to first speak to a financial advisor who specializes in working with entrepreneurs to receive careful, dispassionate advice and professional planning. It is also wise to enlist a tax advisor or attorney as part of your team to get the best picture of how this will impact your overall finances and legal situation. Understanding all your options and their ramifications will put you in a better position to pursue the most worthwhile strategy.
At Rock House Financial, we specialize in helping business owners with their financial needs. Reference this comprehensive guide and contact us to discuss your specific concerns in more detail.