planning is most crucial when wanting to implement this strategy. “[Business owners] have got to start planning early so they can bridge the gap between the two generations,” says Jeff Faulkner, a partner with The Rawls Group, a succession planning business based in Orlando, Florida.
Unlike a third-party sale, where an owner exits the business entirely with a maximum profit, “with a son or daughter, you want to transfer the business and perhaps stay involved for a period of time,” says Faulkner. “You also want to transfer it in such a way that they can afford it.” That may mean having the child or family member buy stock gradually or pay you through a promissory note based on future earnings. Faulkner says the key is making sure you have enough investments outside of the company “so you can turn over control of the business without hindering or impacting your sense of security.”
Selling to partners or employees This is an effective option when you want to relinquish control gradually. Generally, “you’re not transferring initially a controlling interest,” says Brown. “You’re selling a smaller amount. They pay for that smaller amount and then they buy some more. So the owner can maintain control for a far longer time period.” As with selling to family members, it’s important to make sure you have enough resources from the business and outside of the business to maintain your retirement.
Liquidation Generally the least desired and most tax-costly exit strategy is liquidation, in which a business simply sells its assets and closes its doors. The main reasons for liquidating, says Brown, include: “You can’t sell the business based on the money it’s making, or the asset value of the business may be more than the value that the owner can sell the business for.”
Exit Checklist
Once you determine which exit strategy you’ll take, there’s still work to be done. Make your transition is profitable and smooth with these tips:
Know your business’ worth. Whether you’re selling your business or liquidating and selling the assets, an appraiser can help you identify an asking price that is likely to get results.
Assemble an advisory team. A tax professional, legal adviser, and financial planner can help ensure that you relinquish control of your business with as much cash as possible. After all, “it’s not how much you get, it’s how much you keep,” says Julie Gordon White. Author John Brown says, “The only way to ensure you will exit successfully is by spending the time to develop an exit plan based on your objectives and the resources of your business.” A trained exit planning adviser is critical to properly designing a plan to convert the owner’s largest asset to cash.
Have key managers in place. If you’re selling your business, you want to have key employees who can keep things running. “If I want to sell my business to an outside third party, they are going to want to see that someone remains who knows the business,” says Brown. Likewise, “If I’m going to