By Brian MacMillan (bmacmillan@bwfa.com; (410) 461-3900)
Most business owners are so focused on running and growing their business that they have not planned for the eventual sale or transition of that business. Yet, most of their wealth is tied up in their business, so properly planning an exit strategy will have a huge impact on their retirement years.
What should a small business owner do? The short answer is: start planning now. Here are some of the key areas in which discussions should take place many years before a business transition occurs.
Goals
The first step should be to sit down with an experienced merger and acquisition professional to discuss the available options. As part of those discussions, the owner should begin to define his or her goals related to the sale of the business. When does the owner want to retire? Does he want to remain involved in the business? What amount of money does the business owner need from the sale of the business in order to fund his desired lifestyle? Identifying the business owner’s goals will allow the owner to determine which exit options may be suitable for his or her situation.
Valuation
Determining a fair market value for the business will give a picture of where the owner stands in relation to their goals. Depending on the time horizon for the sale, having an early valuation performed on the business may enable the owner to make changes to the business to increase its market value. BWFA’s Business Services team has experienced business-valuation analysts who can perform a fair market valuation for the business owner.
Taxes
Another major issue is making sure that the business is set up in a fashion that will minimize the tax impact of a sale. Most small business sales are completed as “asset sales” rather than “stock sales.” However, many older businesses have been set up as C Corporations, which could result in double taxation after a sale (once on the corporate side and then again on the personal side).
If the business owner has five years or more until a planned sale, it may make sense to change the structure to an S Corporation. Certain exit options can more tax advantageous than others as well. BWFA’s tax advisors can work closely with the business owner to compare the choices.
Potential Buyers
Who will buy the business is always a major question. Many business owners want to transition the ownership of the business to heirs, but it is estimated that this is only an option for about one-third of baby boomers who own businesses. Many children of small-business owners have seen how hard their parents have worked, and they have gone in other directions with their careers.
Other options include selling to a current manager or co-owner, selling the stock to an employee stock ownership plan (ESOP), selling to another company, and selling to an investment group or private equity company. Of course, each option has pros and cons that need to be weighed by the owner. Some may be more favorable for taxes. Others may allow the business owner to sell the company and still continue to work and contribute to the company that he or she has built.
Conclusion
Many business owners nearing retirement age love the work they do, but they need to fund their retirement nest egg. They also want to relieve themselves of at least some of the risks associated with owing a small business.
But selling requires many difficult steps—valuing the business, finding the right buyer, setting up the optimal tax structure, and more. Getting started on those tasks years in advance of a planned sale is the best way to ensure that the right bases are covered. Contact BWFA’s merger and acquisition team to discuss how we can help address those issues.