In an ideal world, every seller of a privately-held company would leave the closing table with enough cash to enjoy the “golden years.” But we live in the real world and unless your company is worth well in excess of $10 million and you find a buyer who is willing and able to pay all cash, you may receive part of the consideration for your company in a form other than cash. If you transfer your company to an insider (co-owner,
In a strong Merger & Acquisition (M&A) market, buyers compare the relative strength of your company’s value drivers to those of your competitors. In today’s M&A market, however, buyers want companies that possess all of the characteristics of a well-run business. Additionally, tighter credit forces buyers to use more of their own capital to buy businesses so they look for acquisitions that carry minimal business risk. Companies with strong value drivers in place carry less risk.
Planning for your business’ future success is a long-term effort in problem solving. Usually, the problems you’ll try to solve result from the natural evolution of the business. For example, as your business has grown, you may have hired more employees or managers to keep pace. Problems like these are good problems to have.
But as many owners create road maps for future success, they can create problems for themselves. Self-made problems are much more difficult for owners to solve,
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.