By Boyce F. Lowery, CLU, ChFC
If you’re a business owner approaching retirement—whether you’re 10 to 15 years away, 5 years away, or even closer—you have a lot to consider in terms of your exit strategy from your business. Retirement is a challenging financial and emotional transition for nearly every retiree, but perhaps even more so for business owners.
You’ve perhaps spent decades building your business, watching it grow, and reaping the rewards of your hard work. Valuing your business appropriately, choosing the right selling option, and eventually handing over the reins to someone else is no easy feat. It requires careful planning to ensure the preservation of the business as well as a smooth transition for you as the owner. Many business owners are very concerned about the fate of their employees as well.
What Are Your Options for a Business Sale?
Some business owners assume their only option is to sell to a third-party buyer, but this just isn’t the case. Third-party sales are certainly common, but they’re not always the most cost-effective option, nor is a third-party sale always what’s best for the business and its employees.
The truth is, you have many options in front of you, each of which can be categorized into two broader groups: internal sale options and external sale options. We briefly describe some common internal sales strategies below.
Next month, we’ll be talking about external sales strategies for business owners who are more inclined to develop an exit plan that involves a third-party sale or other external sale option.
It’s important to remember that the best option for you will likely depend on a variety of financial factors as well as non-financial factors. The financial factors you’ll want to consider may include your ideal sale price and/or the appropriate valuation of the business, your company’s debt, your company’s assets, and potential taxes and transaction fees.
Important non-financial factors may include the level of involvement you’d like to have as you transition out of the business, the level of obligation you feel you have to your employees, and your intentions for the future of the business—your legacy.
Four (4) Common Internal Selling Options
When it comes to internal sales, this typically means you’ll be selling the business to a manager or members of your management team, the employees of the business, or one or several of your family members. Here are some of the strategies you can use to accomplish one of these types of selling options.
1. Management Buyout (MBO) or Leveraged Buyout (LBO)
If you plan to sell your business to members of your management team, you’ll likely need to consider financing options for the new owners. You can provide your own financing in the form of a seller’s note, or you can have a bank provide the financing if you plan to exit more quickly. In some cases, management teams also pool their own resources and/or use private equity financing in addition to seller financing to purchase the business from the exiting owner.
2. Sell Stock to an Employee Stock Ownership Plan (ESOP)
Employee Stock Ownership Plans (ESOPs) can be an excellent option for business owners who have a strong sense of loyalty to their employees and want to provide them with a secure future going forward. An ESOP also has exceptional tax benefits for the ongoing business enterprise as well as for the owner who is selling his/her business. In many cases, an ESOP can provide the best overall economic value to a business owner due to the valuation methodology, possibility of warrants and the unbeatable tax benefits. Although the name would imply that the employees are buying out the business owner, that is not the case. An ESOP is a qualified defined contribution retirement plan that provides for tax deductible company retirement plan contributions to be used to purchase the stock of the business owner. Bank leverage is commonly used to provide significant cash to the seller at the close of the transaction.
At Suncrest Advisors, we are very experienced when it comes to helping our clients implement ESOPs. When an ESOP isn’t the right fit, we can connect our clients with qualified business brokers or an investment banker as applicable.
3. Stock Redemption Plan
Stock Redemption Plans are similar to MBOs, but often take a longer period of time to execute. This might be a good option for business owners who want to transfer out of the company more gradually. Stock Redemption Plans can also carry significant risks that require very careful planning to avoid payments being classified as dividends rather than payments for stock. For this strategy to work well, the succession plan must rely on strong company profits and sufficient trust between the seller and the buyers. The seller in essence becomes a company creditor reliant on the long-term success of the business to collect the value agreed for the sale.
4. Partial Sale to Family Member
If you’re planning to sell your business to a family member (or group of family members), you have options here as well. If your family members don’t have the personal resources to purchase the business in full (which is common for family sales), you’ll need to finance the sale.
Most banks will not extend a business loan to individuals who don’t have a strong commercial credit history, in which case you will have to provide your own financing in the form of a seller’s note. As with many of the other strategies discussed above, there needs to be ample trust between buyer and seller for this option to work out in the favor of both parties.
However, utilizing a partial sale strategy allows business owners the chance to transition slowly out of the business as successors learn the ropes. Gradually exiting business owners can continue to offer guidance and perspective as they relinquish control.
How We Help
Just like retirement planning, business exit planning is very much a unique and personal process. We’re here to help. At Suncrest Advisors, we help business owners develop custom succession and exit plans that balance their financial and non-financial priorities to pursue the best for both the business and the business owner. Call us at 888-827-0146 today for a free and confidential consultation to see how we can help. Remember, we’ll discuss external sale strategies for business owners in the next article, so stay tuned.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.