All business owners eventually face the tough, unavoidable task of deciding how to transition out of their company.
“Exiting a business is a major step that requires years of preparation to execute in a way that leaves owners confident with the future legacy of the company they have built over many years and with enough income to carry them through the next stage of life,” says Jim Altman, middle market Pennsylvania regional executive at Huntington Bank.
He says making the best decision requires seeking advice from those with different points of view on the best strategy, rather than relying on emotions to guide the decision — a fault of many in the position. But the key is to evaluate the objectives that matter most for owners and their families, and to prioritize a plan accordingly.
Smart Business spoke with Altman about exit planning, and options available to owners once a liquidity event occurs and is complete.
What are the more common ways in which business owners exit their companies?
For owners who have family members working in the business who are experienced and qualified to run the company, it’s logical, as one viable option, to transfer the business to them as part of a generational transfer. But sometimes emotions tied to family supersede making the best business decision, and an owner may decide to transfer ownership to a family member who isn’t ready. That decision often puts the company’s future in doubt.
Selling to an independent party offers one attractive option to consider and the most often used for owners to seek a competitive bid and maximize their return. This also allows the seller to receive immediate funds after a sale if no seller note is involved.
Another option is to sell the company to employees under an employee stock ownership program. After tax considerations, it could be one of the most lucrative choices for owners and most favorable to employees. It also creates an opportunity for family to have an ownership stake in the business while the owner can continue to draw money out of the company over time in the form of a seller note or ongoing management fee.
The main thrust for owners is to understand their priorities. It could be important to some owners that family stays attached to the business. Other times, owners could prioritize getting the most money they will use to fund retirement or their next investment. All that matters is that owners consider what is in their best interest and have a plan to achieve it.
Who should be part of the discussion as business owners consider their exit strategy?
There should be at least a trio of people involved: an accountant, legal adviser and banker. All three bring slightly different, but very valuable, perspectives.
Additionally, exiting owners should seek opinions from other people in their network who have sold companies and ask them how they came to their decisions, what happened and whether they’d do anything different. Even if the choice is clear, it’s still a good exercise to understand the pros and cons of each option. This is likely the only time business owners will sell their company, so it’s critical to gather as much information as possible during the process.
What should business owners consider about what happens after the sale event?
Owners should consider their next-stage investment strategy while they put together an exit plan. Too many owners don’t consider that. A full financial plan can help determine the best investment strategy and it will account for the individual’s priorities — whether it’s an immediate return so there’s money to spend on living in the moment, or having money to pass to the next generation.
There will come a time when owners can no longer run their business. Start planning the exit well ahead of that time. Consider the succession of the business and what to do with the proceeds. Revisit the exit plan annually and make adjustments when circumstances change. Seek out the opinions of many people, especially those who have sold their companies, and don’t let emotion trump best judgment for all in the long run.
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