All business owners eventually face the tough, unavoidable task of deciding how to transition out of their company.
“Exiting a business is a major step,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank. “It requires years of preparation for owners to leave with the future legacy of their business intact and with enough income to carry them through the next stage of life.”
Making the best decision requires evaluating the objectives that matter most for owners and their families, getting advice on the best strategy from those with different points of view, and planning accordingly.
Smart Business spoke with Altman about what business owners should consider as they plan to exit their closely held company.
How do business owners typically exit their companies?
One viable option for owners who have family members working in the business who are experienced, qualified and interested in staying on to run the company is to transfer the business to them as part of a generational transfer.
Selling to an independent party is most often used for owners who have no family who wish to take over the business. The priority for owners in this situation is often to maximize their return. This also allows the seller to receive immediate funds after a sale if no seller note is involved.
Owners could also sell the company to employees under an employee stock ownership program (ESOP). After tax considerations, an ESOP could be one of the most lucrative choices for owners and most favorable to employees. It also creates an opportunity for family to have an ownership stake in the business while the owner can continue to draw money out of the company over time in the form of a seller note or ongoing management fee.
The main thrust for owners is to understand their priorities. Does the owner want to ensure that family stays attached to the business? Preserve their company’s legacy? Make sure the employees who helped them build the business are taken care of? Or is the priority getting the most money they can to fund retirement or their next investment? Owners should consider what is in their best interest and put together a plan to achieve it.
Who should business owners talk with about their exit strategy?
An accountant, legal adviser and banker all bring slightly different, but very valuable, perspectives to the conversation. Exiting owners also should seek opinions from those in their network who have sold companies and ask them how they came to their decisions, what happened and whether they’d do anything different. Even if the choice is clear, it’s still a good exercise to understand the pros and cons of each option. This is likely the only time business owners will sell their company, so it’s critical to gather as much information as possible during the process.
What plans should be made for after the sale event?
A full financial plan, created while they put together an exit plan, can help an owner determine the best investment strategy. It should account for the individual’s priorities — whether it’s an immediate return so there’s money to spend on living in the moment, having money to pass to the next generation, and/or philanthropic gifts to charitable organizations.
There will come a time when owners can no longer run their business. Start planning the exit well ahead of that time. Consider the succession of the business and what to do with the proceeds. Revisit the exit plan annually and make adjustments when circumstances change. Seek out the opinions of many people, especially those who have sold their companies, and don’t let emotion trump best judgment for all in the long run. ●
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