5 Ways To Sell or Transfer Your Business

After spending years establishing and growing your business, you know that creating success for your company isn’t something that happened overnight. In the same way, crafting a succession plan takes years of thoughtful planning. And yet: According to the Business Enterprise Institute, while 53% of business owners expect to fully exit their company in the next ten years, only 20% have a defined exit plan. Without a detailed and robust succession plan, you risk leaving the future health of your business hanging in the balance.

If you’re less than five years away from selling your business, the time to plan is now. To help you decide what to consider in your succession plan, here are some tips on how to prepare your business for sale – plus five different transfer strategies.

Preparing for the Sale

A fundamental step in getting ready to sell or transfer your business is to assess what drives the value of your business. What’s going well? What may need some improvement? You’ll also want to think about how transferring or selling your business will impact your financial security in retirement. Consider things like how much money you’ll need to support your lifestyle, whether you’d want to receive all the cash at closing and what your ideal deal structure would look like.

Keep in mind that there are other considerations at hand as you prepare to sell aside from the sale price. For example, you may care about the culture, reputation and ongoing health of your business even after you’ve stepped away, and therefore want to ensure the business goes to someone you trust. While there is no one correct way to transfer your business, businesses typically change hands through one of the following vehicles:

Selling to a Third Party

While selling to a third party may provide the biggest payout and be the fastest way for you to exit, this option could also sacrifice your opportunity for a thoughtful transition. It has its positives, like giving you the ability to simply walk away from the business or to participate in the growth after the transaction, but it often results in giving up control to the new owners. As a result, they could replace trusted management or make changes to policies that could impact the culture and morale of the business.

Questions to consider:

• How well do you know and trust the buyer?
• Have you thought about the potential trade-off between receiving top dollar for your business and putting your legacy at risk?

Selling to Co-Owners

The process to buy or sell ownership within a company varies based on the business structure and the terms of the existing agreements among the owners. For example, the way in which ownership is transferred would be different if the business is a corporation versus a partnership or an LLC. If you’re considering a sale to a co-owner, be sure to go over documents already in place such as your shareholder’s agreement, partnership agreement or LLC agreement to follow the rules you and your co-owners previously agreed to regarding ownership transfers.

If you choose to sell to your co-owners, your business may retain its current management. Plus, business disruption is often avoided with a sale to a co-owner, and the impact to customer loyalty can be significantly minimized.

Questions to consider:

• Will selling to co-owners require your continued involvement in the business?
• Are your co-owners equipped to run the business on their own?
• Are you willing to extend your involvement in the business to aid in the transition?

Transferring to Family

Family transfers, with proper planning, can be tax-advantageous, and allow your legacy in the business to live on through your loved ones. If you choose to go this route, keep in mind that the IRS closely scrutinizes family transfers, and significant planning may be required for gift and estate taxes following the transfer.

Questions to consider:

• How interested is your family’s next generation in keeping the business going? Would they be better off with cash following a third party or co-owner sale?
• Will your heirs be ready to take over when you retire?
• How might bringing in your heirs impact your key employees and other stakeholders in your business?
• Would this kind of transfer complicate how you ultimately divide your estate?

Management Buyout

When a company’s management team purchases the business and its assets from the owner, a management buyout occurs. While the structure of a management buyout often offers certain tax advantages, the valuation of the business is generally lower, and financing on the part of the seller is often required. As a result, deals of this nature may also limit future growth possibilities.

Questions to consider:

• How much confidence do you have in the management team’s leadership? Will you need to step back in if they struggle to run the business?
• How much do you want to be involved in the company following the sale?
• If negotiations break down with the management team, would that damage your existing business relationships?

Employee Stock Ownership Plans

These specialized qualified retirement plans for employees, similar to 401(k)s or profit-sharing plans, invest primarily in the employer company stock. Employee stock ownership plans provide compelling tax advantages both to the owners and the company, and owners selling stock can, in certain circumstances, defer the capital gains indefinitely.

Employee stock ownership plans have been used effectively to allow shareholders to sell gradually and ease out of the business over several years. They also can contribute to a culture of ownership, where employees are personally invested in the success of the business. These plans come with considerable set-up and maintenance fees, but have proven to be a good strategy for companies with a strong culture – particularly those with motivated employees who are eager to be owners.

Questions to consider:

• Are your company’s cash flow and earnings big enough to warrant the fees associated with an employee stock ownership plan?
• Could the makeup of your employee pool impact the feasibility of an employee stock ownership plan?
• Do you have the time to wait before you see a full return on the stock sold?
• How important to you is it that your company remain independent?

By proactively creating a detailed transition plan, you can maximize your opportunity to control your business’s destiny, retire the way you’ve envisioned, keep your business in good hands and complete a successful transfer. After dedicating much of your life to building up your business, don’t let the absence of a transition plan compromise all the work you’ve already completed. When you’re ready, partner with your Baird Financial Advisor – they can help you to understand your goals, risk tolerance and more to determine the right transition plan for you.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.