In today’s economy, making payroll each month can be challenge. It is easy to become distracted from achieving your long-term goals when you are in survival mode. However, if you are approaching retirement, now is the time to begin putting together your business succession plan because it takes strategic planning and time to execute it.
When you decide that it is time to turn over the keys to your business to someone else, there are many choices for you to consider in addition to the obvious choice of selling your company to a third party. There are other business succession options including: (i) succession to a family member, (ii) selling the business to a management team via a leveraged buyout or employee stock option plan, (iii) merging the business with a competitor and retaining equity, or (iv) selling the business to a private equity firm or like company.
Family succession usually involves an emotional attachment to your business, and oftentimes the seller provides owner financing to the family member to facilitate the transaction. This business succession option may not be the best way to maximize financial value, and it will result in you taking an ongoing risk in the transaction. However, it may be your perfect option if you want to continue your family-owned business from one generation to the next.
An employee stock option plan (“ESOP”) is another business succession option for you to consider if you want to enable your employees to acquire beneficial ownership in your company without having to invest their own money (i.e., when your employees are unable able to purchase your company with their own money). The advantage to you under an ESOP is that the ESOP makes pre-tax dollars available to finance business growth, and it can create ownership liquidity at the time of retirement. It also provides you with tax advantages on sale proceeds and provides advantages to your employees by enabling them to acquire stock without paying a current income tax on the stock.
As you know, the structure of your business succession deal is very important. Cash is always king and should be your preferred structure. However, if you are financing your business succession deal, then you should receive a much higher price, particularly in deals valued under $25 million.
If you are considering a merger with a competing business or selling to a private equity firm, then many factors will come into play in your decision to proceed. By working with a family business lawyer, you will be able to evaluate these options, and decide which business succession option is best for your situation. Some questions to consider when discussing your plan with a family business lawyer should include:
(i) When is the correct time to develop an exit plan?
(ii) Which of the exit alternatives are feasible for the business?
(iii) Do I need an advisor team?
(iv) What is my business worth?
(v) Does continued family ownership make sense?
(vi) What value can I obtain by selling to management?
(vii) What type of third party buyers would be interested in my business?
We can assist you in the analysis and election of a business succession plan that meets your specific needs. We will meet with you and provide complete analysis of the various issues associated with your business and business succession plan. Additionally, we will assist in preparing your business to be sold, which includes dressing up your business prior to entertaining offers, maintaining management continuity, utilizing a pass-through entity (Sub S, LLC), identifying and resolving litigation, intellectual property, environmental and other contingent liabilities, determining reliance on key customers or suppliers, identifying personnel issues, and obtaining audited financial statements.
The Parents Estate Planning Law Firm, PC
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