In growing your business you’ve reaped tremendous joys and also made decades of sacrifices. As you approach retirement, you need to think about the next chapter for yourself and your business. Exiting the company you’ve built requires taking steps to leave your business in trustworthy, capable hands and maximizing the proceeds to fund your retirement.
Read on for insights from First American Bank’s experts on three exit strategies for business owners and how to decide which is optimal for your financial gain as well as the long-term well-being of your business and employees.
Employee stock ownership plans (ESOP) are tax-advantaged vehicles that enable business owners to sell some or all of their business to their employees. They’re attractive in alleviating some of the significant tax burdens that can come with a sale, including the ability to defer or potentially eliminate capital gains taxes, as well as provide the ongoing company with substantial tax savings going forward.
An ESOP retains a company’s existing management structure and entire workforce, allowing you to transition your business to the people who understand and are best equipped to uphold its culture and values, rather than a third party that may lack this deep attachment and legacy knowledge. However, ESOPs can only be implemented if a company has more than 15 employees and EBITDA of $750,000 or more.
If you’re thinking about an ESOP, it’s good to think ahead. ESOPs often take six months or more to plan and execute. First American Bank is one of only a few national banks with a specialized ESOP financing group staffed by experienced ESOP lenders with a wide network of ESOP professionals who can assist with the initial planning, designing a sound financing structure, and tailoring a plan for transitioning business ownership to your valued employees.
If a family member has the skills and desire to succeed you as owner of your business, you can transfer your business to them. But before you begin the transfer process, you should work with a third-party valuation expert who can objectively assess your company’s financials, competitive advantages, management team, customer strength, and long-term industry trends to come up with a price for your business, as well as consulting with a qualified tax professional and estate planning attorney. Early planning will present substantial tax savings strategies.
Once you’re equipped with this information, you’ll need to decide how you’ll transfer your business—either as a gift (federal gift taxes may apply) or through a sale. With a full sale, you receive all the proceeds minus state and federal taxes. Whereas in a partial sale, you retain your position as owner, with the buyer becoming co-owner. Alternatively, you can sell certain assets, like your customer and employee base, and offset the taxes with income from the revenue-generating assets that you retain, like rented-out office space.
If neither current employees nor a family member seem suited to take over your business, a third-party sale can be attractive—and less risky if the buyer offers an all-cash buyout.
Work with a certified appraiser who can make an objective valuation of your business and enable you to negotiate for the largest payout. Next, determine the type of sale that’s best for you and your business:
- Stock sale: you sell company stock and pay taxes on any capital gains.
- Asset sale: you sell company assets and pay the corresponding taxes.
Once again, early planning will present substantial tax savings.
When planning to exit your company, always work with a financial advisor you trust. An advisor can introduce you to an accountant and business attorney specializing in your chosen sale type to ensure you comply with applicable financial rules and regulations throughout the entire exit process. Equally important, your advisor can guide you on which exit strategy makes the best sense for you and your retirement goals, as well as put together a post-sale investment plan.
Exiting a business is a major life and financial change. With an expert and trusted business team, you can minimize stress and maximize financial gains to enjoy your retirement.
In partnering with First American Bank, you get a dedicated financial advisor who works for you. Together with our team of specialized business lenders, we’ll tailor an exit strategy that meets your needs, and those of your business and employees so everyone can look forward to the next exciting chapter.
