Close to Retirement? Then You Need an Exit Strategy
If you own a business, your most valuable asset is likely your closely held interest in that company. And if you are nearing retirement, you need an exit strategy. The good news is that there are many options for you to consider. The M&A advisors and investment bankers of Doeren Mayhew Capital Advisors have outlined just a few below.
Find A Strategic Buyer or Financial Investor
Owners nearing retirement often possess one singularly attractive trait — vast experience running the company in question. Such experience may help entice a larger number of prospective buyers, including financial investors, besides natural buyers such as competitors, suppliers and/or customers that may consider buying your business.
In the case of financial investors (like private equity firms or private investment firms), the owner of the established business more often than not may assume a consulting role to subsequently and gradually transfer management to his or her financial partner. In certain cases, the owner may retain some ownership and remain part of the management team with the prospect of retiring and eventually selling their interests, while others may retain their interests in the combined entity, but become silent partners or board members.
Careful selection of a strategic financial partner promotes business continuity and may facilitate maximizing value in the immediate, interim or long-term. Knowing the pros and cons of strategic vs. financial investors is critical to accomplish ones expected outcome. In general, a strategic buyer might be willing to pay a premium over fair market value if the business interest contributes value-added synergies, while a financial investor may pursue growth more aggressively in the interim that may build the foundation for greater returns in the mid-term to long-term future, and also for the business owner who retains an interest.
Look In-House for Buyers
Before soliciting outside investors, business owners should look at existing managers and co-owners. These are potential buyers who already know how the business runs, thus easing the transition to new ownership and minimizing the hassle of due diligence performed by an outside party.
Some management buyouts are financed via an employee stock option (ESO) program, which in some companies supplements management compensation packages. Other buyouts occur through buy-sell agreements, whereby other shareholders buy out a departing owner’s interest under a formal contract.
Yet another approach is an employee stock ownership plan (ESOP) — a form of defined-contribution retirement plan in which employees become owners over time. To qualify for favorable tax treatment, ESOPs can not discriminate in favor of highly compensated employees or owners. Most ESOPs allow all full-time employees with one year of service to participate.
How does an ESOP work? You set-up an employee benefit trust, which is funded with company stock or with cash to buy the stock. Sometimes the trust borrows money to buy it. The trust can buy stock from shareholders, thereby creating a market for their shares and thus providing them liquidity. Since qualifying contributions are a tax-deductible expense for the company, ESOPs offer many tax advantages. But they’re complex and highly regulated.
Keep It in the Family
If family members are qualified and willing to assume ownership of the business, they are an option, too. But good succession and estate planning is critical. So be sure to work with a qualified estate planner.
Estate planning vehicles — such as grantor retained annuity trusts (GRATs) and family limited partnerships (FLPs) — can enable owners to gift business interests at substantial discounts from the net asset values of the entity’s underlying assets. These discounts arise because recipients lack control over decision-making, as well as a ready market for selling their gifted interests. The size of lack of control and marketability discounts varies depending on factors such as transfer restrictions, trust or partnership agreements, the nature of the underlying assets and state law.
Get and Stay “Sale-Ready”
Not all business exits are planned. Owners may die, shareholders may part ways or financial failure may necessitate liquidation. Operating in a “sale-ready” state will help maximize returns should the unexpected strike.
“Sale-ready” refers to clean, transparent business operations with assets in good working condition and minimal reliance on key people. Put yourself in a potential buyer’s shoes and evaluate what could make your business a more attractive acquisition candidate.
Gather Your Team
There are many ways to structure an exit strategy. To get the most bang for your buck, you will need the right team. It’s critical to involve experienced CPAs and investment bankers, like those at Doeren Mayhew and Doeren Mayhew Capital Advisors, in the process. Together with your financial and legal advisors, they can help you get a fair price for your business. Contact our investment bankers to get started today.