Are you looking to transition your business in the next three to five years? If so, now is an excellent time to start thinking about setting yourself up for success, how it will be funded, and who you need on your team.
One of the biggest decisions is whether to sell to a third party or keep the business “in the family” by selling to the next generation or current employees. Each scenario comes with its own unique challenges. It is important to take time to consider your goals, which might range from maximizing value to maintaining the company legacy, taking care of employees, retaining a percentage of ownership, or selling outright. Below are a number of options to get you thinking about transition plans.
Children or Family
If you’re considering selling or gifting your business to children or other family members, one of the main benefits is preserving the legacy you’ve built since the family typically knows the story, history, and goals of the business better than anyone else would. However, it’s important to consider that a family transition will likely mean tax consequences and a lower valuation. Accordingly, you’ll want to work closely with your tax advisor, accountant, financial advisor, estate attorney, and commercial banking team to decipher the details of passing the business down, as well as creating a funding structure — typically a combination of gifting and bank debt — that works for both you and the family.
Management Team
Selling to your management team isn’t all that different from selling to family, and you’ll want to work with the same team of professionals. By passing business ownership to a trusted long-term management team, you can feel confident that your employees will be cared for. However, valuation might take a hit, and finding the right type of funding could be challenging. Often, members of your management team can look to individual equity, SBA loans, bank debt, or a seller’s note to enable the transaction.
Private Equity
If you’re seeking a bigger payout, private equity will likely offer a higher valuation than an “internal” sale. The flip side is that owners will often deal with a lengthier sale process and a loss of control over the legacy and future of the company. You should work with an investment bank, tax advisor, and accountant to figure out what type of funding will best fit, whether it’s bank debt, mezzanine debt, new equity or a seller’s note.
Strategic Buyer or Competitor
The biggest hurdle of selling to a strategic buyer or competitor is the nature of the competition or business. And since funding typically comes from the existing company that knows your business, you’ll likely get the highest valuation possible because the acquirer can often offset costs and redundancies. While it can be financially advantageous to go this route, you may not be able to ensure the future of your key employees or the legacy you’ve built. Working with an investment bank, business broker, accountant, and attorney can help determine if this is the correct route.
Employee Stock Ownership Plan (ESOP)
An ESOP is a trust funded by the company in which the employees own business shares. ESOPs may be one of the more complex options for a business transition. Still, having a management team you trust allows for a smooth transition to secure your employee’s future. Employees will be vested in the company’s success, which can spur growth. On the other hand, an ESOP can be restrictive and offer a lower valuation but can provide potential tax benefits. It is important to work with an ESOP specialist as well as a tax advisor and your commercial bank team to understand if this is a sensible option.
Are you ready to sell?
Many business owners are committed to and passionate about the work they do. They often tell family and friends that they’re going to retire by 70 — but when that time comes, they find they aren’t ready to give up control of the company they’ve helmed for so many years.
One way to lessen the shock of retirement is to begin the succession planning process early and create an exit strategy that fits the needs of each individual business owner. The team at Univest has extensive experience creating customized financing solutions for business owners aimed at meeting their goals. If you are ready to have a conversation about the process, contact us at 877-723-5571 or univest.net.
Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.
