How can I exit my business in the right way?
An ESOP Solution is Only One of Many Options For a Successful Exit of Your Business.
ESOP Plus® creates employee stock ownership plans to provide a tax efficient way to sell your business to your employees. However, an ESOP may not be right for you. If we decide with you that another exit strategy is better for you the ESOP Plus® team can bring together the other advisors you need to help you explore other exit plans as well as succession plans, employee motivation plans and business consulting services that will increase the value of your business.
You might think that exiting your business will be easy.
That might possibly be the case, but it is more likely that careful planning will be necessary protect your wealth and your values for you and for your family. Obviously, this planning needs to take your financial situation into account. Proper comprehensive planning for your exit from your business will need to address at least the following concerns:
You Will Want Your Business Exit to Provide Adequately For Your Financial Needs.
- Am I going to retire, or am I going to start or buy another business?
- How much money will need I need to get from a sale of my business to support the life choices that I intend to make as I taper off my current working career?
- How much do I intend to leave to my family, to other people or to charities at my death?
- How much volatility (risk) am I willing to take with my assets?
You may have a disproportionate percentage of their assets in the value of their closely held businesses. Selling all or part of their businesses enables you to diversify your assets and create a different risk profile for the next stage of your life. A good investment advisor can work together with you, key family members your CPA and your other trusted advisors to help you determine the most appropriate answers to these questions for your individual circumstances. If you do not have advisors with whom you feel comfortable the ESOP Plus® team can work with you to find the right advisors.
You Will Want Your Exit Plan to Fulfill Your Non-Financial Personal Goals.
- Do you want to retire completely now, or do you want to phase out?
- Do you want the legacy of your brand and business practices to continue after you leave?
- Do you want to reward all or some of your employees?
- Do you have family members or key managers who you would like to take over the business?
Perhaps you would like to diversify your wealth without selling all of your business now. Maybe you would like to move your business to the next plane by getting a capital infusion. Maybe you’re ready to sell your business and move to the retirement location of your dreams. Maybe you would like to phase out from business involvement over some period of years. Maybe you’re not sure of your personal goals or you would like to combine several goals.
Different Exit Strategies Can Serve Different Goals.
We describe below in summary form a few different exit strategies that you should consider along with some of their characteristics. If you wish to pursue the issue in more depth, John Leonetti has written an excellent book, Exiting Your Business, Protecting Your Wealth, that describes these and other strategies and their application in much more detail. The book is available from Pinnacle Equity Solutions.
- You can sell your business outright.
- If there are good strategic reasons to do so, buyer might pay more than traditional “fair market value” for your business. For example, the buyer may be seeking to limit competition, or it may be seeking a more cost effective way to extend its product line or its geographic reach than if it developed the new business itself.
- You can exit your business quickly and move on to your other life goals.
- There are many “sell side” advisors are competent to guide you through the process that will assure your most successful exit both from an financial and from a person standpoint. If you do not know any such advisors, the ESOP Plus® team can help you find advisors (including skilled and experienced merger and acquisition counsel and a market savvy financial intermediary) who can help you negotiate the transaction.
- The net proceeds to you will likely be reduced by taxes and substantial transaction costs.
- The buyer will likely insist on a sale structure that will make the proceeds fully taxable to you. If your business is a corporation (even an S corporation) it is possible to end up with a double tax on some part of the sale.
- Transaction costs are typically higher for out-and-out sales than with other strategies.
- You will need to follow the advice of an experienced sell side financial intermediary (investment banker) to maximize the value of your sale. Most sell side financial intermediaries charge fees that are based upon an escalating percentage of the sale price.
- After you have discussed fees including monthly retainer fees, if any, with the financial intermediary based on your estimate of the value of your business, you probably will want to consult with your tax advisor to determine the net proceeds you are likely to receive from the sale after fees and taxes. (See the page on this website entitled “What Is My Business Worth?” for a discussion of valuation.)
- If you sell your business outright, you will lose all control of the business immediately. You may be able to negotiate an employment agreement with benefits or a covenant not to compete for a limited period of time, but the value of these contracts will count against the purchase price.
- You will not likely be able to protect the jobs of your employees (particularly key management employees) except for a limited time.
- Ultimately, your business may or may not stay in its current geographical location.
- You could seek a private equity investment for part of your business.
- In this kind of transaction unlike the total sale, the private equity group will normally purchase a controlling interest in your business, and you will continue to hold the remaining ownership interest.
- Typically, even thought the private equity group controls the business you would continue to operate it with the idea it the business would be sold in its entirety after a few years.
- Often, the private equity group will give advice to you about increasing the value of the business prior to the ultimate sale.
- At the time of the sale of the entire business you and the private equity group would split the proceeds. In this way, you would get a “second bite of the apple”.
- The sale proceeds at both stages of the transaction would typically be taxable.
- Any investment banker who “found” the private equity would typically get a fee.
- You can create an ESOP and use it to buy all or part of your business.
- The ESOP is a tax qualified profit sharing plan that is similar to a 401(k) plan except that employees do not contribute to it. It has special provisions that allow it to buy your shares and to borrow money from your company, a bank or other lender to purchase the shares.
- You can sell all or any part of your shares to the ESOP for cash or notes.
- The principal payments on the notes used to pay you are sheltered from tax.
- You may be eligible to postpone paying tax on a sale of your share to the ESOP if your company is a C corporation and immediately after the transaction, the ESOP owns at least thirty percent of the shares of the company.
- The price paid for your shares is “fair market value”. There is no increase for strategic value because the ESOP is a purely financial buyer. Furthermore the price of the shares sold to the ESOP is discounted for minority interests and for lack of marketability.
- ESOP transactions typically have a lower transaction cost than outright sales or private equity investments.
- The differerence in transaction cost and the tax benefits of an ESOP sale may increase the net proceeds to you to be equal to or greater than the net proceeds from other transactions.
- You can retain practical control of the operations of your company long after you have sold all or part of your shares to the ESOP.
- You can continue to protect and employ your valued employees.
- The geographical location of your company will not be changed unless you or your employees want to change it after the ESOP has bought your shares.
- Your legacy and business values can continue on in the wholly or partly owned ESOP company.
- There is an excellent and very inexpensive basic ESOP book written by Scott Rodrick, Director of Publishing and Information Technology at the National Center for Employee Ownership. The title of the book is: An Introduction to ESOPs. It is available at www.nceo.org.
ESOP Plus® is a nationally recognized leader in complex, multidimensional ESOP law and business exit and succession plans. We are the industry-leading boutique ESOP law firm, serving clients in the United States. The international reach of our partners gives ESOP Plus® a unique ability to implement effective employee ownership solutions for businesses with a presence across U.S. borders. Unlike most law firms that provide occasional ESOP, exit and succession plan representation, we are focused only in these areas. Our firm spends all of its time providing advanced Next Generation ESOP Plus® business exit solutions.
ESOP Plus® is the right partner for you to choose to explore your exit opportunities.