The market has indicated that 20 percent of businesses are for sale to a third party, but only one out of four actually sells. For businesses above $10 million per year; however, the odds improve to 50 percent. In a retirement situation, a sale to a third party too often becomes a bargain sale – most often the only alternative to liquidation. This option becomes necessary in many situations because owners fail to create a market for their stock through sale to family members,
You have made up your mind that you will transfer ownership of your company to an insider — whether it’s your children or key employees. However, you may not be ready to turn over total control of the company just yet. In fact, you may want to make sure you can undo any damage that could result from your successors failing to successfully carry on the business, as well as failing to pay you in full for the business.
When creating an effective, tax-efficient wealth transfer strategy, you should focus on three basic issues that should be resolved for successful wealth preservation planning to occur. These issues include:
Fixing your financial objectives before considering a wealth transfer.
- Determining the amount of wealth to be transferred and identifying how much is too much.
- Designing a wealth transfer strategy that keeps the IRS from becoming the largest beneficiary of your hard-earned cash.
Steve Smith was no different than millions of other baby-boomer business owners in that the thought of leaving his business was never far from his mind, no matter how far away his exit might have been. He daydreamed about transferring the business to his oldest daughter and perhaps to a member of his management team, yet he couldn’t gauge their passion for owning a business and hadn’t tested their management skills.
Five reasons that owners actually do sell their companies to their key employees:
- Owner has already achieved financial security. Owners who have already achieved financial security (separate from and prior to any sale or transfer of their companies) enjoy the luxury of selling to their key employees. They may have wanted to sell to them because they felt they “owed” their employees or even because they had promised to do so, but the reason they actually do so is because their own financial independence is secure.
Before they can sell or exit their businesses with financial security, most owners need to grow their companies’ cash flow and transferable value significantly. Without management leading the charge, this is a most difficult task in today’s economy.
Few sophisticated buyers will seriously consider acquiring a company that lacks a capable management team that remains with the business after the owner exits.
A sizeable percentage of businesses are sold to key employees—up to 40% according to a recent survey of 700 written exit plans created by advisors belonging to the BEI Network of Exit Planning Advisors.
One of a business owner’s greatest challenges is to attract, motivate, and keep key employees. As owners near the finish line (the exit from their businesses), often tired and distracted by the end of the race, they often assume that it is no longer desirable to keep and motivate key employees. Keeping key employees is not only desirable, however, it is necessary if the business is to be sold—and sold at the highest possible price.
Owners begin thinking about the Exit Planning process when two streams of thought begin to converge. The first stream is a feeling that you want to do something besides go to work everyday: either you would like to be someplace else—doing something else—or you simply no longer get the same kick out of doing what you are doing.
The second stream is the general awareness that you:
- Are close to financial independence,
Successful owners are usually optimistic people, somewhat averse to dwelling on the more unpleasant aspects of business. Contemplating one’s demise certainly qualifies as an unpleasant aspect. Consequently, advisors to owners tend to use a lot of buzz words when we talk about business continuity. We ask, “What happens if the owner ‘passes on’ or ‘leaves the scene?’” We talk about the consequences of an owner’s death upon the business in theoretical, third party terms:
“Should an owner die …” Unfortunately,