Ask SmallBiz: Transferring Ownership
Q. We are growing our business and want to make sure that we are able to perpetuate it long after we are no longer active in the company. We have no children, so what are our options to ensure the business continues after we retire?
Christine Lanning, Controller, Integrated Security Technologies Inc.
A: Transferring ownership of a family-owned company is always complex, and it is particularly challenging when there are no family members to transfer the business to. Start planning at least five years before your exit date and begin by analyzing the following three options.
- Employee stock ownership plan: An ESOP is a common way in which your employees can own a share of the company. It is an excellent way to motivate employees and build loyalty, and they can get shares as a bonus, buying them from the company or receiving them through an ESOP.
The cost of creating an ESOP is estimated to be as much as $30,000. Nonetheless, the number of ESOPs in the United States has been growing since about 1974. Today, around 11,000 companies have ESOPs, with nearly 8 million employees participating.
- Selling to one or more key employees: Here the analysis is entirely internal. Who do you consider to be your key employees? Do they have the ability to take on the ownership and leadership of the company? Are they interested and can they raise the money to buy it?
You also must decide whether to sell them the entire company or retain a small percentage of ownership. This decision depends on how the purchase is financed; if it is highly leveraged, you may want to retain a small percent of ownership to protect your interest.
- Selling to an external third party: The likeliest candidates are your biggest competitors. Tread carefully when you start investigating these companies and their owners because it’s a small market and word leaks easily.
As you look at these possible buyers, consider how they benefit from purchasing your company. What value will your company add to the combined entity? Consider the markets and products they deal with and try to get a sense of their corporate culture to determine how easy or difficult the integration of the two firms would be. Consider if there would be duplication of talent when the companies merge and how that might be resolved.
Next, try to imagine how the buyout of your company would happen: How long would it take? How would it be financed? What would happen to the employees, the vendor relationships and, of course, the customers?
No easy answers in this one. Get started on your exit planning now and get help as you navigate these complex areas, as mistakes can be expensive.
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