4 Options to consider when planning to exit your small business

CMR Risk & Insurance Services Inc. > Blog > Business > 4 Options to consider when planning to exit your small business
Posted by: CMR September 6, 2022 No Comments

Planning an exit strategy from your small business can be hard. You’ve worked your whole life to get where you are, so how do you leave it behind? As you plan for retirement or a new chapter of life ahead of you, let’s discuss four options to consider.

● Selling to private equity ● Internal transition ● Strategic buyers ● ESOP (Employee Stock Ownership Plan)

It’s critical to understand how each one works as well as their pros and cons, so you can pick the best option for your journey.

1. Private Equity

Private equity (PE) firms can be an ideal exit strategy as you plan to exit from your small business. Selling your small business to a private equity firm is easier than ever as many companies look to expand or buy a competitor.

PE firms offer expertise, can refine the organizational vision, and provide cash to help expand the company. Additionally, you can take some chips off the table to create personal liquidity. In many cases, PE firms will have you keep a stake in your company. If you hit certain growth numbers, you can participate in the upside value of your company. While there are numerous advantages of choosing a private equity firm to take over your business, this option is not for everyone.

If you are looking to sell and walk away, there would be better options for you because you tend to have to stay involved in the business for a period of time. In addition, you will now have to answer to the PE firm, which could cause potential conflict.

2. Internal Transition

When planning to transition internally before exiting your small business, you need to think of the best decision for yourself, your family and your company. That decision may be to sell internally to an employee, family member or someone you already know.

The advantage of this choice is that you’re selling to a known person, and you can remain involved in the company if you like. However, this decision can bring up possible family issues.

One mistake I’ve seen is owners giving away the business to a family member that may not be up to the task. The owner needs to sell the business. They need to monetize and put money away for their future.

The issue with giving away the business is the risk that the next generation will run the company to the ground. In that scenario, the owner may not get paid for a lifetime of work and there is an increased potential there won’t be assets for the next generation to inherit.

Owners who do not plan carefully for transition often face the liquidation of their business for much less than its value or by closing the business with no return upon that event. However, if you plan carefully, you’ll get to see the value of the work you’ve spent your entire life unfolding before you as you pass your business on to the next qualified person. It’s a great feeling to see your success continue on as you phase out.

3. Strategic Buyer

Selling to a strategic buyer brings many advantages to the table for ownership and the company as a whole. This strategy will generally bring the highest sale price for the owner. In this scenario, professionals must be on your side. Buyers have done this many times before and are very skilled at purchasing companies. In most cases, this will be the first and only time the owner will be selling. As such, the business owner is at a great disadvantage. The buyer will look to take advantage and offer a lower price. As a result, it’s critical for the owner to seek professional help, so they can help guide through this process. Thanks to this partnership, less stress and higher prices should be achieved.

Some things to be aware of are the potential loss of employees and forfeiture of your legacy. As you go through the sale process, your employees might hear about the sale and worry about their job, resulting in an exodus of employees that can hurt the sale. In addition, when the sale is complete, the buyer might fold your company into theirs, and your company’s name might no longer exist. Thus, the legacy that you created will be gone.

4. ESOP (Employee Stock Ownership Plan)

ESOP is when you sell to your employees through a stock ownership plan. Recently, this tactic has been growing in popularity because of its tax advantages to you and your company. It comes under IRC section 401(a) and is considered a qualified defined contribution plan. If you follow the requirements of the code, there are tremendous tax advantages. It’s important that your company maintains a steady cash flow to qualify for this option.

While there are a lot of hoops to jump through, this method is a great option for an owner that would like to sell the company, potentially pay fewer taxes, keep the same employees, and hold their legacy. On the downside, ESOP can be time-consuming and add the risk of the company faltering as employees get further financial ties to the company. Additionally, leaders must consider current and future government regulations when it comes to ESOP.

What strategy is going to work best for you and your small business? Sit down with a trusted group of advisors to start the planning process early. When the time comes to exit your business, good pre-exit planning will give you the leverage to put yourself and your company in the best position possible. Don’t wait too long and find that your exit options have dwindled and your decision has already been made for you.

Source: https://www.propertycasualty360.com/2022/09/06/4-options-to-consider-when-planning-to-exit-your-small-business-414-226983/

Author: CMR

Leave a Reply