Exit Strategies for Retirement & the Next Generation The most important day of a business owner’s life is the day he or she exits the business. While exciting, this time can be very stressful if the proper strategy is not in place regarding who will go on to take over the company. Because many aspects can take years to prepare, a business owner should start planning their exit strategy far in advance of their actual exit to ensure a successful result. To increase the value of the business prior to a sale, the business owner will need to work on increasing transparency, efficiency, and revenue, while also reducing risk. There are four ways that the Faughnan Financial team helps our clients exit their businesses: Sell to Key EmployeesSelling a business to key employees is similar to transferring your business to a family member. Business owners usually choose this exit strategy when they want to pay one or more employees back for their contribution to the company’s success or when they want to provide a key employee a business opportunity that may lead to financial success similar to the business owner. When there isn’t a market to sell a business to a third party, selling the business to a key employee can be a good alternative. Similar to transferring the business to family members, there is the risk that key employees may not want or have the capacity to assume the ownership role or the capital to finance the transaction. If this is a strategy that you are considering, schedule a consultation with one of our financial advisors to learn how we can create an exit strategy for your business.Sell to Family MembersTransferring a business to family members is the ideal exit strategy for many business owners. This exit strategy is widely preferred because it allows the ability to provide for the well-being of their family members and to keep the business in the family. Additionally, the business owner’s tax liability may be limited if the business interest is transferred during his or her lifetime as a gift. This strategy, however, can result in family conflict as some family members simply do not want to own the business, and if others do there can be issues with treating all family members equally. Additionally, when transferring the business to a family member, it may not provide the business owner enough capital to stop working and live comfortably. Careful planning with one of our Financial Advisors can help you evaluate whether a family transfer or sale will be in the company’s best interest. If sibling rivalries could be an issue, a carefully prepared plan should be created that outlines ownership shares and decision-making authority.Sell to 3rd PartiesAn outright sale to a 3rd party is probably the simplest way to exit a business. This approach makes sense when a business owner’s family members have no interest in taking over or when the owner can’t take the company to the next level or meet challenges that have arisen. There is two ways to sell to a 3rd party: An owner sells the company’s assets outright, or the stock in the company (or units if it is a limited-liability company). Stock sales usually benefit the seller, while asset sales benefit the buyer. Asset buyers purchase the company’s physical equipment, facilities, and customers, as well as the intangibles like trademarks and goodwill, and they are generally protected from prior claims against the business. For example, the previous owners would most likely be responsible if an environmental claim is made against their former property or if an employee they hired filed some sort of lawsuit. Stock purchasers are buying the company itself and therefore, they are exposed to all of its potential problems. This is why most sales of small, closely-held businesses are structured as asset sales. If you need help creating a plan for the sale of your business to a 3rd party, contact our financial advisors today.ESOPs (Employee Stock Ownership Plans)If your firm is substantial enough, employee stock ownership plans may be a great option. ESOPs are a qualified retirement plan that allows employees to be owners of the business. This strategy is ideal for companies with high-value employees, low debt, and solid prospects. With an ESOP, the business owner sells a trust to the employees. A business can make tax-deductible deposits into the ESOP trust with the trust gradually purchasing the owner’s shares or the ESOP can borrow funds to buy all the shares through a bank loan to the company that is loaned to the ESOP. There are a number of advantages of an ESOP, as this option usually results in a very motivated workforce, allowing the business owner to receive cash at closing, flexibility regarding when the sale takes place, and the owner’s involvement after the sale. An ESOP, however, may not provide as much cash as a sale, can tie up the business owner’s assets as collateral to secure the loan, and may not provide key employees enough benefits to stay with the company. Additionally, there are a lot of regulatory requirements to an ESOP and this option may be very expensive and complex to set up and maintain. In order for this option to work, the company must be making enough money that it is able to buy the owner out and there must be a plan for management continuity. If you are interested in learning more about ESOPs, schedule a consultation with one of our financial advisors. Let’s talk about your exit strategy! Get In Touch With Us Name Email Address Phone Question Thank you! Oops!