Exit Strategies for Business Owners
After years spent launching and growing your business, the day will finally arrive when you can sit back and enjoy the fruits of your labor. But, just as starting your business involved hard work and planning, the process of exiting your firm can be a long and challenging process.
After years spent launching and growing your business, the day will finally arrive when you can sit back and enjoy the fruits of your labor. But, just as starting your business involved hard work and planning, the process of exiting your firm can be a long and challenging process.
Many entrepreneurs put off making decisions about the disposition of the business until their departure is imminent. Waiting until the last minute to put together an exit strategy can, however, prove to be an expensive mistake. Unanticipated events—such as a health crisis, a divorce, or the death of a business partner—may force you to dispose of the business quickly, and at a loss. Having a transition plan in place will greatly improve the chances that you will be able to draw income from the business to support your retirement needs, and ensure that the business is passed on as you had intended.
Closely-held companies often have in place a business succession plan that establishes a monetary value for each owner’s business interest before the need arises. A succession plan typically has at its center a buy-sell agreement, or a contract that obligates the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders, to the business itself, or to both. Buy-sell agreements are often financed with life insurance.
If you wish to pass on the business to family members, consider in advance the best succession method. Transferring ownership of the business to a relative at no cost can result in substantial gift or estate taxes if it is done all at once. To take advantage of gift tax exclusions, start giving stock in the company to future heirs years before the expected transition. This could reduce or eliminate the taxes owed when the business finally changes hands. You can also sell the company to family members, though there may be tax obligations for the seller if the business is sold at a reduced rate.
A private annuity can provide a tax-efficient means of transferring ownership to the next generation. Under the terms of a private annuity contract, the heir agrees to pay the owner a certain sum of money at set intervals, usually for the duration of the owner’s lifetime, in exchange for receiving the property. This type of arrangement can help you to secure a retirement income, but carries the risk that the heir will default on the annuity obligations.
If there is no co-owner or family member prepared to take over the business, you could sell the firm to current employees. This can be the best option for smaller businesses with low cash flow levels that might have difficulties attracting the interest of third-party buyers. Employees already involved in the management of the business will have a good idea of what the company is worth, and have the knowledge necessary to keep the business running after your departure. It may be possible to structure the sale so that the agreed price is paid off over time, thus producing an income for the former owner.
If you are considering selling to employees in the future, you may want to establish an employee stock ownership plan (ESOP). In addition to serving as a performance incentive, there are substantial tax advantages associated with selling a business to an ESOP.
It may also be possible to recruit an outside buyer for your company. This route can be especially lucrative if the business is growing quickly and market conditions are favorable. A business appraiser can help you determine what price you might achieve on the open market, and a business broker can assist you in locating a buyer. Keep in mind, however, that preparing a company for sale can involve a great deal of work. Carefully review your financial statements and operations for any weaknesses that could make the company less attractive to a potential buyer. With sufficient preparation, you may be able to greatly enhance the value of your company before putting it up for sale.
Regardless of which exit strategy you choose, it is best to make the transition a gradual one. If you intend to pass on the business to family members or employees, appoint a successor to take over as head of the company while you are still involved in the business. In some cases, you may want to make arrangements to remain involved in the business as a consultant or employee even after the firm has been sold or otherwise transitioned to a new owner. If the business is owned by family members, your connection with the company may never be completely severed.
Planning for the day when you will leave your business is a complex undertaking. If you’d like to discuss any concerns with a trusted business advisor, our team at BSA would be happy to consult with you and help assess how you can maximize your gain from the disposition of your business, and enjoy a comfortable retirement.
Formulating Your Business Succession Plan
Ownership of a business frequently represents years, if not decades, of hard work and entrepreneurial savvy. Still, even the most astute business owners are often unfamiliar with the complexities and meticulous preparation that must go into a successful succession strategy.
Ownership of a business frequently represents years, if not decades, of hard work and entrepreneurial savvy. Still, even the most astute business owners are often unfamiliar with the complexities and meticulous preparation that must go into a successful succession strategy. Whether you’re contemplating transferring your business interest to family members, liquidating assets or selling your share to current management or an outside party, you have decisions to make and complex issues to address.
Selling Your Business 6 Steps You Should Take Now
As a business owner, and the quarterback of your future, take an offensive versus defensive position on implementing a business sales process.
Are you considering selling your business? Whether you're planning for retirement, exploring new ventures, or simply ready to move on, selling your business is a significant decision that requires careful consideration and strategic planning. Here are six essential steps to guide you through the process:
Evaluate Your Readiness: Before diving into the sale process, take stock of your readiness. Assess your personal and financial goals, and determine if selling aligns with your long-term objectives. Consider your emotional readiness as well; selling a business can be an emotional journey, so ensure you're prepared for the transition.
Prepare Your Business: A well-prepared business is more attractive to potential buyers and can command a higher sale price. Clean up your financial records, ensuring accuracy and transparency. Address any operational inefficiencies and mitigate risks to enhance the value of your business. Consider investing in professional valuations to determine a fair asking price.
Assemble Your Team: Selling a business is a complex process that requires expertise in various areas. Assemble a team of professionals, including legal advisors, financial consultants, and business brokers, to guide you through the sale process. Their expertise will help navigate legal complexities, negotiate favorable terms, and maximize the value of your sale.
Market Your Business: Once your business is prepared and your team is in place, it's time to market your business to potential buyers. Develop a comprehensive marketing strategy that highlights the unique selling points of your business and targets potential buyers effectively. Utilize online platforms, industry networks, and professional connections to reach a wide pool of qualified buyers.
Negotiate and Close the Deal: As offers start rolling in, negotiate terms that align with your objectives and maximize the value of your sale. Work closely with your team of advisors to review offers, conduct due diligence, and finalize the terms of the sale. Once negotiations are complete, proceed to closing with confidence, knowing that you've secured the best deal possible.
Plan for the Future: Selling your business is just the beginning of a new chapter. Take time to plan for the future, whether it involves retirement, pursuing new opportunities, or transitioning into a different role within the company. Develop a comprehensive exit strategy that addresses your personal and financial goals, ensuring a smooth transition for both you and your business.
Selling your business is a significant milestone, and navigating the sale process requires careful planning and execution. By following these six essential steps, you can maximize the value of your sale and achieve a successful transition. If you're ready to embark on this journey, our team of experienced advisors is here to guide you every step of the way. Contact us today to learn more about how we can help you achieve your business succession goals.
Business Succession Advisors is there for you every step of the way to ensure a successful sale process. Check out founder Nick Giacoumakis’ guidance on how to engage prospective buyers in Kiplinger’s.