Small
Business Accounting - Selecting your business successor is a
fundamental objective of planning an exit strategy and requires a careful
assessment of what you want from the sale of your business and who can best
give it to you.
There
are only four ways to leave your business: transfer ownership to family
members, Employee Stock Option Plan (ESOP), sale to a third party, and
liquidation. The more you understand about each one, 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 what you need to know about each one.
1. Transfer Ownership To Your Children
Transferring
a business within the family fulfills many people's personal goals of keeping
their business and family together, but while most business owners want to
transfer their business to their children, few end up doing so for various
reasons. As such, it's necessary to develop a contingency plan to convey your
business to another type of buyer.
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.
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.
On
the other hand, 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 the others.
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, what an ESOP does is create a
third-party buyer (your employees) where none previously existed. After all,
who more than your employees has 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 have any questions about setting up an ESOP for your business, give us a
call 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 up front 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, 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. This way any outstanding balance payable to you is "icing on the
cake."
4. Liquidation
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.
If
you need assistance figuring out which exit strategy is best for you and your
business, please don't hesitate to contact us. The sooner you start planning,
the easier it will be. We're here to help! For no obligation free consultation
contact us today!
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763) 269-5396
