Plan is Best?
your business successor is a fundamental objective of planning
an exit strategy and requires a careful assessment of what you
want from the sale of your business and who can best give it
There are four ways to leave
your business: transfer ownership to family members, Employee
Stock Option Plan (ESOP), sale to a third party, and
The more you understand about each one, the better the chance
is that you will leave your business on your terms and under
the conditions you want. With that in mind, here's what you
need to know about each one.
Transfer Ownership to your Children
Transferring a business within the family fulfills many
people's personal goals of keeping their business and family
together, but while most business owners want to transfer
their business to their children, few end up doing so for
various reasons. As such, it's necessary to develop a
contingency plan to convey your business to another type of
Transferring your business to your children can provide
financial well-being for younger family members unable to earn
comparable income from outside employment, as well as allow
you to stay actively involved in the business with your
children until you choose your departure date.
It also affords you the luxury of selling the business for
whatever amount of money you need to live on, even if the
value of the business does not justify that sum of money.
On the other hand, this option also holds the potential to
increase family friction, discord, and feelings of unequal
treatment among siblings. Parents often feel the need to treat
all of their children equally. In reality, this is difficult
to achieve. In most cases, one child will probably run or own
the business at the perceived expense of the others.
At the same time, financial security also may be diminished,
rather than enhanced, and the very existence of the business
is at risk if it's transferred to a family member who can't or
won't run it properly. In addition, family dynamics, in
general, may also significantly diminish your control over the
business and its operations.
Employee Stock Option Plans (ESOP)
If your children have no interest or are unable to take
over your business, there is another option to ensure the
continued success of your business: the Employee Stock
Ownership Plan (ESOP).
ESOPs are qualified retirement plans subject to the regulatory
requirements of the Employee Retirement Income Security Act of
1974 (ERISA). There's one important difference, however; the
majority (more than half) of their investment must be derived
from their own company stock.
Whether it's due to lack of interest from your children, an
economic downturn or a high asking price that no one is
willing to pay, what an ESOP does is create a third-party
buyer (your employees) where none previously existed. After
all, who more than your employees has a vested interest in
ESOPs are set up as a trust (complete with trustees) into
which either cash to buy company stock or newly issued stock
is placed. Contributions the company makes to the trust are
generally tax deductible, subject to certain limitations and
because transactions are considered stock sales, the owner who
is selling (you) can avoid paying capital gains. Shares are
then distributed to employees (typically based on compensation
levels) and grow tax-free until distribution.
If your company is a stable, well-established one with steady,
consistent earnings, then an ESOP might be just the ticket to
creating a winning exit plan from your business.
If you have any questions about setting up an ESOP for your
business, give the office a call today.
Sale to a Third Party
In a retirement situation, a sale to a third party too
often becomes a bargain sale - and the only alternative to
liquidation. But if the business is well prepared for sale
this option just might be your best way to cash out. In fact,
you may find that this so-called "last resort" strategy just
happens to land you at the resort of your choice.
Although many owners don't realize it, most or all of your
money should come from the business at closing. Therefore, the
fundamental advantage of a third party sale is immediate cash
or at least a substantial upfront portion of the selling
price. This ensures that you obtain your fundamental
objectives of financial security and, perhaps, avoid risk as
If you do not receive the bulk of the purchase price in cash,
at closing, however, your risk will suddenly become immense.
You will place a substantial amount of the money you counted
on receiving in the unpredictable hands of fate. The best way
to avoid this risk is to get all of the money you are going to
need at closing. This way any outstanding balance payable to
you is "icing on the cake."
If there is no one to buy your business, you shut it down.
In liquidation, the owners sell off their assets, collect
outstanding accounts receivable, pay off their bills, and keep
what's left, if anything, for themselves.
The primary reason liquidation is considered as an exit plan
is that a business lacks sufficient income-producing capacity
apart from the owner's direct efforts and apart from the value
of the assets themselves. For example, if the business can
produce only $75,000 per year and the assets themselves are
worth $1 million, no one would pay more for the business than
the value of the assets.
Service businesses, in particular, are thought to have little
value when the owner leaves the business. Since most service
businesses have little "hard value" other than accounts
receivable, liquidation produces the smallest return for the
owner's lifelong commitment to the business. Smart owners
guard against this. They plan ahead to ensure that they do not
have to rely on this last ditch method to fund their
If you need assistance figuring out which exit strategy is
best for you and your business, please don't hesitate to call.
The sooner you start planning, the easier it will be.
SMEED CPA Adds Financial
Services To Help Clients With
Investments & Insurance
often we here at SMEED CPA are asked about financial issues
that impact our clients investments and their portfolios.
We always offered our opinion and suggestions but in order to
help our clients actually execute the changes we suggest,
SMEED has created a Financial Services division.
SMEED Financial Services, Inc. will be able to
work with both individual and business clients on their
investment portfolios and manage assets on their behalf.
SMEED Financial will include Michael Uadiale,
ACA, CPA, CGMA; and Pablo Blanco who has
recently joined SMEED and comes with over 18 years of
financial sales and advising experience with affluent
Watch your inbox and mail boxes for more specific information
on services SMEED Financial Services, Inc will make available
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