It’s never too early to start thinking about your ownership-transition strategy, regardless of where your business is in its life cycle.
Smart Business spoke with Dave Schaich, president of Western Pennsylvania Middle Market at Chase Commercial Banking, who provided an overview of some of the choices, in order to help you consider all the options you can pursue.
If you’re a business owner at the outset of succession planning, where’s a good place to begin?
Start by laying out all the options available to you, and make a list of the pros and cons for each. This will give you a more complete picture and should help you to align the needs of your organization with the future you envision.
What’s one option for sellers to consider?
If you don’t necessarily want to stay involved after the sale, consider selling to a third-party strategic buyer. One advantage is that sellers can leverage a control premium — this is the amount a buyer is willing to pay above the current market price of a company, usually because the buyer wants to acquire a controlling share or make changes to the cost structure.
Another consideration is maximum up-front liquidity. Strategic buyers tend to be more familiar with the business model and can more easily integrate the acquired business into their existing platform, resulting in greater sale proceeds at close.
What if the owners want to stay involved with the company after the sale? Are there some options for these sellers?
It’s fairly common, and there are a lot of options for sellers in this situation — employee stock ownership plans (ESOPs), leveraged recapitalizations or selling to a financial acquirer, to name a few.
Financial acquirers are a good option for an owner who not only wants to be involved after the sale, but also wants to continue operating the business.
Some financial buyers are looking for companies with shareholders who are active in management and want to supplement, rather than replace, the team. If you’re ready to diversify your personal balance sheet, but not yet ready to give up your place at the helm, this might be a good option.
You mentioned ESOPs. Who might find this option attractive?
Generally, after leveraging its assets to purchase shares, the company conducting the ESOP sells 25 to 100 percent of the company to its employees. This allows the owners, in effect, to sell the company to itself. This creates a lot of equity incentive — with an ESOP, all participating employees have an incentive to ensure that operations run well and the company is successful because they’re now financial stakeholders. It’s also a great tool for recruiting and retaining great employees.
Another thing to consider is tax deductions — company contributions to ESOPs are generally tax-deductible and may qualify for capital gains tax deferrals and other tax benefits to the redeeming shareholder, all of which lead to increased cash flow.
What else should be taken into account?
Owners with available time and capital might consider utilizing initial public offerings (IPOs) to shift the business from being privately held to being a public company where securities are exchanged publicly.
There are a lot of new responsibilities and compliance issues the business will face, but the big advantage is that there’s increased liquidity for shareholders. Any pre-IPO investors in the company will have the opportunity to monetize their investments as their shares take on cash value, which can be a strong exit strategy for business owners. There’s also increased growth capital. Companies undergoing an IPO receive a direct boost to liquidity and can be used as expansion capital.
Ultimately, however, every business has unique needs, and every owner wants a unique result out of succession planning. The key is to get all of your stakeholders together, and create a plan that makes the most sense for you and for your business.
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