How to Leave Your Business
Are you a business owner thinking about exiting your company? Which exit strategy will benefit you most? It’s a tough move to undo, and you should know the pluses and minuses going in. Click here to read in PDF format.
8 Ways to Get Out of Your Own Business
- Transfer the company to a family member.
- Sell the business to one or more key employees.
- Sell to employees using an employee stock ownership plan.
- Sell to one or more co-owners
- Sell to an outside third party.
- Engage in an initial public offering.
- Become a passive owner.
- Liquidate.
Emotions Surrounding Business Venture Exits
While your emotions during the business exit process can be overwhelming, your ability to make sound decisions needs to be intact. Try to speak and think in a straightforward manner. Try to look at the bigger picture and keep the end result in the back of your mind.
Planning Early for Leaving a Personal Business
First, you’re going to want to establish some personal and financial objectives to identify the best buyers of your business. The company has to go somewhere.
Second, determine the value of your company. If you aren’t able to give an unbiased, realistic valuation, contact one of our investment management team members.
Next, you’ll need to evaluate the tax consequences of each path.
Transfer Business to a Family Member
This is normally the first thought whenever someone decides to step away from a company they own. Owners usually considering transferring a business to a family member for non-financial reasons. One of the advantages is that this transfers the business to a known entity. It also provides or helps to provide well-being for your family. Ensures, for the most part, that your business’s ethics, morals, mission, and culture are all carried out and still allows you to remain involved if you choose to be.
The disadvantages of this include:
- Little or no case from closing available for retirement
- Increased and continued financial risk
- Required owner involvement in company post-closing
- Children’s or family member’s inability or unwillingness to assume ownership role
- Family issues that surround treating everyone equally
Transfer Your Business to Key Employees
With this type of transfer, you hope to achieve the same objectives as when transferring the business to a family member, with the added goal of achieving financial security (albeit potentially over time).
Disadvantages of this route resemble those in family transfers and include employees’ possible inability or unwillingness to assume ownership.
Transfer Your Business via ESOP
These qualified retirement plans must invest primarily in the stock of the sponsoring employer. In addition to the advantages of a standard transfer to key employees, you enjoy tax benefits as well as cash at closing. Again though, not all aspects of this route benefit you. ESOPs are costly and complex, offer limited company growth due to the borrowing necessary to buy the owner’s stock, net less than the full value at closing compared with third-party sales, and use company assets as collateral.
Sell Your Business to Co-Owners
Advantages again resemble those of transferring your business to a family member. Disadvantages include the need to typically take back an installment note for a substantial part of the purchase price and, as in other avenues, increased financial risk, owner involvement past closing, and
normally netting less than full fair market value.
Sell Your Company to a Third Party
This generally offers your best chance at receiving the maximum purchase price for your company and the maximum amount of cash at closing. This route appeals to owners intending to leave after they sell and to owners who want to propel the business to the next level with someone else’s financial support. It also allows you to control your date of departure.
Disadvantages include:
- Potential loss of your personal identity as the business owner
- Potential loss of your corporate culture and mission
- potential detriment to employees if you sell to a party that seeks consolidation and
- part of the purchase price may be subject to the future performance of the company after the sale.
Initial Public Offering
This route offers high valuation and cash for the business. Unfortunately, an IPO comes with significant disadvantages—just ask Elon Musk of Tesla.
The disadvantages of this route are primarily:
- limited liquidity at closing
- not a full exit at closing
- loss of full control and
- additional reporting and fiduciary requirements
- Your company needs to be worth over $250 million in order for the IPO route to be considered an appropriate exit option.
Passive Ownership for Retirees
This attracts owners who wish to maintain control, become less active in the company, and preserve the company culture and mission. Your disadvantages stem from you never being able to permanently leave the business, you receive little or no cash when you leave active employment, and you continue to carry the risk associated with ownership.
Liquidation for Fast Cash
Only one situation justifies this route: You want (or need) to leave the company immediately and have no alternative exit strategies. Liquidation offers speed and cash, but can bring enormous disadvantages:
- yields less cash than any other exit route
- comes with a higher tax burden than any other type of sale/transfer and
- has a potentially devastating effect on employees and customers.
Consult a Financial Advisor
At Mink Wealth, we are available to offer guidance, examples, and market perspectives as well as help you carefully compare each path in relation to your final objectives
If you are planning to transfer or sell your business, talk with Mink Wealth today! We can help you understand and clarify your financial goals, plus create an initial plan for your future exit.