Close to Retirement: You Need an Exit Strategy
As a business owner, your most valuable asset is likely your closely held interest in that company. As you approach retirement, you will need an exit strategy. Fortunately, there are many options for you to consider. This article reviews a few of those options.
Find a Strategic Buyer
Business owners nearing retirement often have one uniquely attractive trait — vast experience running their company. This experience may help attract competitors, suppliers, customers or other investors to consider buying your business. Under this scenario, the owner of the established business assumes a consulting role and then over time would transfer the management of the company to their new partner.
Some retiring owners will eventually sell all of their interests. Others will retain their interests in the combined new entity, but will instead become silent partners or board members.
It is important to carefully select a strategic partner who will promote business continuity and maximize return. A strategic buyer might be willing to pay a premium over the fair market value if the business interest contributes additional value or synergies to existing operations.
Look In-house for Buyers
Before seeking outside investors, business owners should consider existing managers and partners. These are potential buyers who already know how the business runs, thus easing the transition to new ownership, and minimizing the cost and inconvenience of due diligence performed by an outside party.
Some management buyouts are financed via an employee stock option (“ESO”) program, which in some companies supplements management compensation packages. Other buyouts occur through buy-sell agreements, whereby other shareholders buy out a departing owner’s interest under a formal contract.
Yet another approach is an employee stock ownership plan (“ESOP”) — a form of defined-contribution retirement plan in which employees become owners over time. To qualify for favorable tax treatment, ESOPs can’t discriminate in favor of highly compensated employees or owners. Most ESOPs allow all full-time employees with at least one year of service to participate.
An ESOP at work: An employee benefit trust is formed, which is funded with company stock or cash to purchase the stock. In some cases, the trust would borrow money to buy it. The trust can purchase stock from shareholders, thereby creating a market for their shares and providing liquidity. Because qualifying contributions are a tax-deductible expense for the company, ESOPs offer many tax advantages, but they’re complex and highly regulated.
Keep it in the Family
Family members who are both qualified and willing to assume ownership of the business, are an option as well. Under this scenario, succession and estate planning becomes critical. So be sure to work with a qualified estate planner.
Estate planning vehicles — such as grantor retained annuity trusts (“GRATs”) and family limited partnerships (“FLPs”) — can enable owners to gift business interests at substantial discounts from the net asset values of the entity’s underlying assets. These discounts arise because recipients lack control over decision-making, as well as a ready market for selling their gifted interests. The size of lack of control and marketability discounts varies depending on factors such as transfer restrictions, trust or partnership agreements, the nature of the underlying assets, and state law.
Get and Stay “Sale Ready”
Not all business exits are planned – events may occur which force a business exit. Owners may decease, shareholders may part ways or financial failure may necessitate a liquidation. Operating in a “sale-ready” state will help maximize your return should such a scenario arise.
“Sale-ready” refers to clean, transparent business operations with assets in good working condition and minimal reliance on key people. So, put yourself in a potential buyer’s shoes and evaluate what could make your business a more attractive acquisition candidate.
Gather Your Team
There are many ways to structure an exit strategy. To get the most value, you’ll need the right team. It’s critical to involve your financial and legal advisors, as well as a qualified appraiser. They can help you obtain the best price for your business.
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