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4 Ways to Exit Your Business Gracefully
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4 Ways to Exit Your Business Gracefully
What happens to your business if something happens to you? How can you retire without destroying the business you spent a lifetime to build? Your business may be your largest asset, and deciding what happens to it can impact your retirement income, your family’s wealth, and the life of the company after your departure. Even if you are only just starting out, these questions should be addressed now because the future is uncertain. Here are four ways to dispose of your company when you retire (or when you die).
1. Sell your business
You can optimize your return by selling your company to a third party. In order to set a fair asking price, you need to know what your business is worth. This can be determined by obtaining a business valuation. More information about business valuation can be found through SCORE.
You may want to use a business broker to help you find a buyer and assist you in the sales process. The broker usually helps you determine value (based on the business valuation) and set an asking price for your business. The commission for a business broker on the sale typically ranges from 5% to 12% of the sale price. If your business sells for under $1 million, expect to pay 12%; there are smaller commissions for larger companies. In working with a broker, check state law on whether there are any licensing requirements. Also, try to obtain referrals from your business connections (e.g., ask your business banker or accountant for a referral) as well as check with the Better Business Bureau to find an effective and reputable broker.
If your business is incorporated, work with a tax advisor to determine whether the sale should be structured as a sale of stock or a sale of assets; different tax results are produced for each choice.
2. Transfer ownership to your family
You can leave your company to your family when you die. This is done through a will or a trust arrangement that you set up before your death. In taking this path, consider whether there is an obvious person (such as your spouse or oldest child) to run the business or whether the family likely will want to sell immediately. Try to anticipate problems (such as control over business activities and sibling rivalries) and address them while you can.
You can begin to transfer your business while you’re alive by making direct gifts of interest in your business to family members. Alternatively, you can put your ownership of the business into a family limited partnership or family limited liability company. This action facilitates your making lifetime gifts and can be used to better structure the management of the company. In both cases, you can retain control over the business during your life by keeping more than 50% of the business.
3. Use ESOPs to transfer ownership to employees
An employee stock ownership plan (ESOP) can be used to transfer ownership of a corporation to employees; this option cannot be used if your business is a limited liability company or other unincorporated entity. An ESOP is not an overnight solution and may take years to develop. Eventually, the ESOP buys out your interest, leaving your employees as owners of the corporation.
The tax rules for ESOPs are very precise, so you’ll need to work closely with a tax advisor to make sure you’re doing things right. Find more information about ESOPs from the IRS.
4. Liquidate your business
If you want out now and can’t sell your business or give it to your children or employees, your only option is to liquidate. This means selling off inventory and other assets of the business. Typically, the price you can expect for assets in liquidation is less than what you’d receive on a retail sale (e.g., 20% less).
You can hold a “going out of business sale” to sell off inventory at bargain prices. Or, you may want to work with a company that can handle the liquidation for you, selling off inventory and your other assets (furniture, fixtures, and equipment); this may be through a sale or an auction. The professional charges a commission based on the sales proceeds or a flat rate based on the length of the liquidation period (e.g., three weeks; six weeks). As in the case of working with a business broker, be sure to thoroughly check out a liquidation professional before you make any commitments.
Keep in mind that the funds you’ll net from a sale are only what you can keep after tax. Some business assets will produce capital gain while others will result in ordinary income.
Be sure that whichever route you choose, you work closely with a knowledgeable attorney who can review contracts, agreements, and other legal matters to protect your interests. Your business is too valuable to make mistakes.
About the Author:
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser's Small Business Taxes, J.K. Lasser's Guide to Self-Employment, and Smooth Failing as well as a trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and host of Build Your Business Radio. She has been included in the List of 100 Small Business Influencers for three years in a row. Follow her on Twitter: @BarbaraWeltman.