Leaving a Business: Which Exit Plan is the Best Option for You?
Posted on September 15, 2015 by Oozle Media
Whether you are closer to retirement or ready for a change, as a business owner, deciding on the right exit strategy for you is an important process. There is no wrong or right way, and in the end, the best way depends on you and your situation. When leaving a business, it requires a careful assessment of what you want from the sale and who can best give it to you. Here are a few important questions to ask yourself when deciding the best plan for you:
- What can you expect to happen when you leave?
- What are your financial goals? How much will you make or hope to make?
- How long will the exit process be?
- Do you want to continue to be involved in your business?
You worked hard in building your business, so we are here to help you come up with the perfect plan for you! As you plan out your business exit, there are four strategies you will want to consider.
1. CONTINUE THE FAMILY LEGACY
Even though continuing the family legacy may sound attractive, you are going to want to be realistic in your planning. For starters, you will need to determine if anyone in your family is the right person for running your business or if it is something they want to do. If you are someone who does not want to completely separate yourself from the business, this could be a great option for you. Transferring your business to your children can provide financial well-being for younger family members who are unable to earn comparable income from outside employment. It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.
Keep in mind that some investors or current employees won’t always support who you choose. This can also at times be a very stressful process depending on your family dynamic. Financial security 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. In addition, family dynamics, in general, may also significantly diminish your control over the business and its operations. This option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of others.
Whichever direction you decide to take, it’s necessary to develop a contingency plan to convey your business to another type of buyer.
2. EMPLOYEE STOCK OPTION PLANS (ESOP)
If your children have no interest or are unable to take over your business, there is 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 from your children, an economic downturn or a high asking price that no one is willing to pay, ESOPs are set up as a trust 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, 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 have any questions about setting up an ESOP for your business, contact Lightheart, Sanders and Associates today.
3. SALE TO A THIRD PARTY
In a retirement situation, a sale to a third party too often becomes a bargain sale–and the only alternative to liquidation. But if the business is well prepared for sale this option just might be your best way to cash out. In fact, you may find that this so-called “last resort” strategy just happens to land you at the resort of your choice. 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 upfront portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.
If you do not receive the bulk of the purchase price in cash, at closing, 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. This way any outstanding balance payable to you is “icing on the cake.”
4. YOUR LAST RESORT: LIQUIDATION
As you decide on a business strategy, liquidation should be your last resort. This can be one of the quickest and most simple strategies in exiting your business. However, you can expect to not get the biggest return on investment with this plan. If there is no one to buy your business, you shut it down. In liquidation, the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, 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.
The sooner you start planning, the easier it will be. If you need assistance figuring out which exit strategy is best for you and your business, please don’t hesitate to call the professionals at Lightheart, Sanders and Associates.