Retirement Planning for Business Owners – Six Ways to Sell Your Business

retirementEveryone will eventually have to retire. That means your business will have to somehow be transferred to someone else. That can happen in a number of different ways. Most business owners will tell you that they want to sell to their children or a third-party, but there really are several other good options.

Selling to relatives used to be common. Now, fewer and fewer take this route. The process can be seriously challenging emotionally especially when multiple parties are involved. Avoiding taxes is another, but the processes needed are well understood by most transition professionals.

Selling to a third-party sounds easier than it is. Only one in five who try actually do. It can be a good option and may result in a premium if you have a desirable patent, a unique process or a particularly lucrative corner of the market. Other buyers simply see acquisitions as a more cost-effective way to grow. If the owner is indifferent to the future of the company and its employees, this will work. Having access to top-notch professional help is crucial. The buyer does and so should you.

The government encourages selling to employees primarily through tax benefits. Selling to employees can be accomplished in a number of different ways, the management buy-out being the most common and most well-known. Less well-known and often misunderstood options are the Employee Stock Ownership Plan (ESOP), the Employee Ownership Trust (EOT) and the Worker-owned Cooperative. Let us look at them one at a time.

The Employee Stock Ownership Plan is often confused with stock options, but that is something completely different. The ESOP does three things. It is at once a transfer of ownership, a productivity enhancing measure and a retirement plan. Because it is a retirement plan, it falls under the regulations of the Employee Retirement Income Security Act (ERISA) of 1974. That makes it a serious challenge to implement and maintain, but the tax benefits are well worth the pain. An ESOP is an example of indirect employee ownership. Employee owned shares are being held in a trust, but in individual accounts. The employees share in growth as well as profits.

The Employee Ownership Trust is a relative newcomer in the U.S., but now quite common in the U.K. where it enjoys far better tax benefits than in the U.S., at least for now. The main benefit of the EOT is that the owner completely controls the transfer process from beginning to end. In fact, the employees do not even need to know until it is all done. An EOT is also an example of indirect ownership. Shares are also held in a trust, but do not need to be held in individual accounts. Employees share in profits only. Unlike ESOPs, EOTs are really simple to set up.

Finally, there is the worker-owned cooperative. As with ESOPs, capital gains on the sale may be deferred under certain circumstances. Worker cooperatives do not have a retirement element, so, like EOTs, they are not heavily regulated. The main benefit to the owner is that his legacy gets preserved and that is for many an attractive alternative to liquidating with resulting job loss. Because of their democratic governance structure, worker cooperatives can be a bit challenging to set up. Gradually transferring ownership is relatively easy. Gradually transferring control, on the other hand, is a significant challenge. Worker cooperatives are an example of direct employee ownership with absolute control the biggest benefit for employees. Ownership is held in individual capital accounts in the form of a buy-in to ensure some skin in the game from participants. Participants share in profits only.

Each of these options require a different strategy and positioning your company for the outcome you want could take some time. Therefore, it is essential that you make three decisions as early as possible:

  1. When do you want to exit?
  2. Who do you want to take over?
  3. How do you want to live in retirement?

You need to get your company ready for the transition, but you also need to get yourself ready. That involves three steps you must take. You must extract yourself from the company physically, emotionally and financially.

Finally, you must

  1. Prepare your exit plan as well as retirement and estate plans for yourself and your family.
  2. Execute them.

They are of little help if you keep them in your drawer. Update them periodically.

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