What to consider when planning for an exit and an ownership transition

As business owners evolve in their life cycle, moving on from the business they built becomes top of mind. But what form that takes, and whether or not the end ultimately serves the owner’s retirement goals, are important questions to answer. Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank, says that’s why owners shouldn’t go through the process alone.

“Build a team,” Altman says. “Involve your tax and wealth planner, your accountant and banker, and figure out how to put the company, yourself and your family, in the best position through the transaction.”

Smart Business spoke with Altman about transition options for owners and how to set up a post-business financial future.

What options are available for business owners looking to exit their company?

The decision on what to do with the business hinges on personal goals. Some business owners are looking to cash out of their company and make as much money on the sale as possible. That typically means selling the company outright to a third party, such as a financial or strategic buyer.

For some owners, price isn’t as important as legacy. While they’ll want to maximize the income from the liquidity event, the priority might be taking care of the company’s employees. In that case, an Employee Stock Ownership Plan might be a good fit.

An ESOP breaks ownership of the company into stock that’s owned by employees. At the time of the sale, the owner doesn’t get everything out in cash at once. Instead, he or she gets a note for part of it and the balance is returned in cash over time. Meanwhile, the owner is able to take advantage of the favorable tax treatment created by an ESOP as well as give the owner the option to remain in an executive leadership role if desired.

Some owners would like to keep the business in the family and do so through a generational transfer. Most companies allow the selling shareholder to continue to draw money from the company as the business is gradually transferred to the next generation. This, like any ownership transfer, takes tax planning to do it right. It also requires having a family member ready, willing and able to take the helm, which might not always be the case.

How should a business owner value his or her company?

Many owners, knowing the sweat equity they’ve poured into the business, believe their company is worth far more than the market will bear. That’s why an independent third party should be engaged to perform a valuation. Accountants who have business valuation practices are one of the best choices for this job, though M&A advisory shops also provide similar quality service.

How does a business owner financially prepare for his or her future after an exit?

The primary question is typically whether the owner will have enough money to fund retirement, or at least life post-business, after a sale. Once that’s satisfied, owners move on to questions regarding the capital and income they’d like to bequeath to family members or to charity. That becomes a balancing act between the needs of family and the owner’s personal goals and objectives.

Preparing for a sound financial future, whatever that might look like, is made easier through the guidance of a wealth planner. The process should start as early as possible. Many business owners wait to seriously plan until a liquidity event is imminent. But a much better strategy, as well as greater peace of mind, can be achieved if planning is completed very early in the company’s existence and then regularly updated.

Coming to terms with letting go of a company built from nothing is difficult. Keep an open mind and evaluate all of the options. With a sound strategy and a trusted team in place, owners can step confidently and securely toward the next stage of their life. ●

INSIGHTS Banking & Finance is brought to you by Huntington Bank

Jim Altman

Middle Market Pennsylvania Regional Executive


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