Trying to decide what to do with your business when you’re ready to step away can be a daunting task. If you’re like most business owners, you want to make sure your business not only survives but thrives for generations after your retirement.
There are many different business exit strategies to consider, but how do you determine which is best for you, your family, and your business? As you begin to think about the best succession plan for your business, it’s important to weigh each option and consider the pros and cons of each.
1. Outright Sale (Internal)
Selling your business outright is one of the simplest exit strategies. Many business owners decide to sell to a co-owner or a key employee who already has the knowledge and experience needed to keep the business on its current track.
This may also allow you to begin the transition many years before you’re ready to retire, giving you time to fully train your successor and ensure they’re capable and prepared before you step away.
One of the biggest advantages of this strategy is that it allows for business continuity. Since the new owner will have a chance to ease into the position, there will be minimal disruption when you step away. If your goal is to leave a legacy and ensure your business survives, then this is a good strategy to consider.
A common drawback you may need to address is a lack of funding. While a co-owner or key employee may be interested in buying you out, they may not have that much cash on hand and may not be able to obtain financing.
If you have the financial means, you may consider offering to finance their purchase. In this type of arrangement, the purchaser would typically make a minimum of a 10% down payment and then agree to make monthly or quarterly payments (with interest) until the purchase is paid in full.
2. Outright Sale (Third Party)
If you want to sell your business but you don’t have an internal party who is willing or able to buy it, you may consider selling it to an outsider buyer. Selling to a third party is a simple exit strategy that allows you to fully walk away and never look back – but there are some significant issues to consider.
Selling your business to a third party rather than making a family transition can help you avoid potential family succession issues. It will also allow you to get cash for your business and step away quickly. Depending on the market for your business and industry, this could be your most lucrative option.
While third-party sales sometimes result in a big payday, there’s also a chance that you could have real trouble finding a buyer. In this case, you could end up accepting a lower offer than you expected.
You’ll also need to consider the possibility that selling to a third party could lead to some animosity from your key employees, family members, and even important customers. In addition, once you make the sale, you’ll have no say in what the buyer does with your business. They could make significant changes that ultimately lead to its demise, so before you decide to take this route you’ll need to make sure you’re comfortable fully letting go.
3. Partial Sale
Issuing shares of your business through an employee stock option program (ESOP) is another succession planning strategy you may want to consider. This is a type of retirement plan for employees that allows them to purchase company stock at a deep discount. Setting up an ESOP early on can make a management buyout much easier in the future.
An ESOP is a great way to incentivize your employees. A partial sale allows the business owner to retain closely held control and, since an ESOP is tax-exempt, you can also keep more capital within the business. This could allow you to invest more in operations and business growth. You’ll also enjoy some tax advantages when you sell your business.
An ESOP is quite complex and has strict compliance requirements. You’ll need to work with a professional who knows how to determine the valuation of a business and be prepared to pay fairly significant annual administrative costs.
4. Family Transition
Many small business owners dream of passing on their company to their heirs. If you have the financial means to do so, you may gift it to them, or you may sell it to them. The majority of business owners who sell to family members do it at a significantly discounted price.
Keeping your business in the family is the number one advantage of this strategy. Under the current tax laws, as long as your business is worth less than $11.7 million, you can give it away without owing any gift taxes. Once you’ve handed over ownership, you also won’t owe any capital gains or estate taxes on the value of the business.
Unless you’re very comfortable financially, giving your business away or even selling at a large discount can put a major dent in your retirement plans. In addition, you may have to consider how you’ll deal with any family issues that arise and how an internal family transition may impact your key employees.
If you’re planning to sell the business, you’ll also need to consider the likelihood that your family member won’t have the cash on hand to pay for the purchase. This typically means you’ll have to offer seller financing or wait to see if they’re able to get a loan.
5. Liquidate and Leave
This last option involves selling off everything you can, paying all your debts, and walking away from your business with whatever is left (if anything).
While this is very rarely a good option, it’s sometimes the last resort for business owners who find that they can no longer run their business and haven’t put a succession plan in place. The simplicity is the biggest advantage of this option, although it comes at a significant cost.
If you walk away from your business without a plan, you’ll minimize or eliminate any possible financial gains. Even worse, the business you spent years building will be gone.
Weigh Your Options Carefully
It’s easy to put off making a decision this big, but the sooner you start your business succession planning, the more likely you are to reach your goals. Understanding the true value of your business is key to making an informed decision. Even if you’re not ready to transition right now, a small business valuation will show you where you currently stand. This will also allow you to start thinking about steps you can take to help increase your business value so it’s where you need it to be when you’re ready to retire.
Ready to get started with your succession plan? You can get a free business valuation with GrowGrade in under 5 minutes! Check it out now and you’ll be one step closer to securing your financial future.