Posted:
4/26/2019
What are your options for exit?
William G. Lako, CFP®
Shawna L. Theriault, C.P.A., CFP®, CDFA®
You’ve worked your whole life building a business and the time has finally come—the time where you feel ready to enjoy the fruits of your labor and retire. But what happens to your business now? Do you want to pass it down to your children? Maybe you don’t have children. How can you exit your business and create the necessary liquidity for you to enjoy the retirement you’ve always envisioned?
This question can be complicated and is a topic that should be planned for years in advance, not just in the short time leading up to your retirement, as most business owners have 80% to 90% of their financial wealth locked in their business. Furthermore, transaction database BIZCOMPS shows the average small business is on the market for more than 200 days with historical transitions success rates only around 20% to 30% nationally, making it even more important to begin your exit planning early.
What are your options for exit? Well, you could just sell your business. Always remember, a suitor is not necessarily a buyer. A potential buyer must be qualified to purchase your business, meaning that they must have the ability to pay and a history of successfully closing transactions. These potential buyers could be a strategic or corporate buyer, a private equity group, or even a competitor.
A strategic buyer may pay a higher price for your business for some tactical reason such as your customer base or your proprietary technology, which creates synergies with its current business, making it more valuable.
Private equity firms, on the other hand, pool investor capital and make investments in companies that they feel they can better manage and grow before selling again at a higher value in three to five years, generally speaking.
Finally, a competitor could be a prospective buyer; however, competitors typically offer the lowest purchase price. A competitor might be interested in gaining market share by purchasing your business, but be aware that your competitor could gain meaningful confidential information about your business if you do engage in negotiations. Nothing says they must buy the business just because they signed a non-compete agreement.
Your exit options aren’t limited to selling to these three types of buyers, however. Perhaps you have groomed a successor that is interested in continuing in the business. This could be a family member, or a non-family employee who has a proven ability to run the business after you’ve left. This plan is very viable if the successor can obtain the necessary financing.
While bank financing is an option here, often the transition will be funded from the business's future cash flows, so it should only be transitioned to someone whom you have faith in to successfully run the business after your exit. A related option is simply grooming a successor who will run the business as you exit, while you retain ownership of company stock. This option allows for the owner to draw on the cash flows of the business while not needing to be present for running the day-to-day operations.
Finally, you can consider an Employee Stock Option Plan, or ESOP. When no one, clear, successor is identifiable, ESOPs allow for transitioning a business to its employees while increasing employee loyalty and productivity as they become owners. This type of exit can ensure a smooth transition and also provide some tax advantages to the seller as well. While this option works for some businesses, it is not for all and often takes considerable time and an increase in debt to establish the ESOP.
There are many options for exiting your business, and no single option is best for all businesses. Each owner’s situation is unique. What is shared amongst all business owners is the need to begin exit planning early. This decision alone will be one of the most important decisions you make as a business owner and has implications far beyond your years as an owner. Now is the time to start planning and Henssler Financial is here to help you along the way with our exit planning services.
William G. Lako, Jr., CFP®, serves as a principal at Henssler Financial. Shawna L. Theriault, C.P.A., CFP®, CDFA®, is a Managing Associate at Henssler Financial, specializing in assisting high net worth individuals, families and businesses in tax, financial and estate planning. Both Lako and Theriault are CERTIFIED FINANCIAL PLANNER™ professionals. Theriault is also a Certified Divorce Financial Analyst® professional. Founded in 1987 by Gene W. Henssler, Ph.D., Henssler Financial provides solutions for individual, corporate and institutional clients that incorporate a range of services, including wealth management, financial planning, tax preparation and consulting, small-business retirement planning and estate planning. www.henssler.com
