How are you going to end the relationship with your business? Believe it or not, that day will come. Fortunately, you have a number of options to plan your exit and watch your legacy continue. Four good, viable options exist to spin off your business. These options involve selling to family members, selling to a key employee, selling to a competitor, or selling to an investor. Business succession and exit planning are somewhat different in concept, but will be used synonymously for the purpose of this article. Though containing important differences, succession planning and exit planning will not necessarily be differentiated for this article.
Family involvement is often the simplest form of business succession planning. Knowing your successor creates a level of trust. Because family members are often involved and familiar with a family business, they can be called upon to either take over or purchase the business. Rendering the business in one form or another to a family member is often emotionally fulfilling because the owner can see the business and its benefits on their own families. The transaction can generally be done through either sale or gift. However, selling the business to the next generation will eliminate many uncertainties that can occur with gifting.
Selling your business outside the family is an option as well. On the positive side, key employees know the business, employees, suppliers, and the customers. They may also know the company overall including bank accounts, the financial situation, the equipment the company owns, and for that matter where the files and keys are kept. The business essentially becomes their turn-key operation. However, problems do exist in business sales to key employees. First, some key employees make “great employees”, but terrible bosses and business people. There is also the problem of financing. Many employees are not wealthy people. A lot of their wealth is in the form of retirement accounts and home ownership. With this financial structure, it is nearly impossible for them to get the full financing to take on the challenges of an acquisition.
This often means the seller must finance the acquisition for the key employee. The seller must lend credit to the key employee to finance the purchase. On the upside of this, the owner retains an interest in the business for which he can retake the business if the key employee/buyer defaults.
An investor, for many smaller businesses is hard to come. Many investors are happy to invest money, but typically they are seeking companies established and operating similarly to a publicly held company. Many or most smaller companies operate for the benefit of the owners’ and their families making them a less attractive option for investors.
There is a clear advantage to selling a business to a competitor. Competitors generally know your suppliers and even your own customers on some level. Competitors also tend to have cash and liquid assets allowing them to be solvent and pay for things like other companies.
On the down side, selling your life’s work to a competitor or getting your business back in the event of a default can be impossible once it is combined with another operation.
Being aware of the possibilities concerning what type of successor you will have for your business can give you a clear vision of what your transition could look like. Not all people have families. Also, not every business has key employees who could take over the business. With the four options discussed above in mind, the business owner can now begin to think about implementing a succession plan.
I would also like to point out that there is yet another option that Mike Ertel has written about over the course of the last six issues of this M&A Update. It is the Employee Stock Option Plan, better known as the ESOP. An ESOP is a relatively complicated arrangement for a company to make. However, the benefits can be substantial for the person wanting to exit a business and employees wanting to fully participate in the company’s success.
By: Roman Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors