Passing the Torch
There comes a day in the life of every business when it’s time to “pass the torch”. And, there are as many ways to accomplish a business exit as there are businesses, but generally most business transitions fall into two broad categories which are sale or transfer. Here we’ll touch on some of the most common means of sale and transfer. And, don’t hesitate to contact us for guidance based upon our broad experience in this area. Not only can we help you optimize value, but we can also help you consider other aspects of your business’ future for after you hand over the torch. Considerations such as maintaining mission, limiting transfer risk, multigenerational involvement, employee retention, and more should be considered.
Business Sale
There’s a great deal more to a business sale than just getting top dollar. But in considering both optimizing value and other key factors, you may discover that “who you sell to” and “how the sale is accomplished” can have a significant impact on outcomes and the transitional success. The following are a few of the typical sale arrangements and some of the potential buyers you might consider.
Typical Sale Arrangements
Cash Sale
Owner Finance Partial
Owner Finance Full
Lease Purchase
Revenue Share Buyout
Stock Sale
Potential Buyers
Individual
Another Business
Employee(s)
Family (children)
Investors (Venture Capital)
Initial Public Offering (IPO)
Business Transfer
A business transfer is an alternative means of exit. You might choose this option for various reasons, but typical transfers occur for tax planning or multigenerational planning purposes.
One example of a transfer might be to gift your company or its shares upon your death to your children; this could help the next generation avoid capital gains tax upon the business sale and/or allow them a stepped up basis of the value upon your death.
Another example of transfer could be an exchange of your company stock for an acquiring companies stock so that you can obtain freedom from management, dividend payments from the acquiring company, and avoid capital gains tax using a like-kind exchange.
Transition Risks
One of the critical factors rarely considered effectively in a business exit are the risks associated with a transition. A cash purchase typically has the lowest risk to the seller because the seller is receiving all of the purchase price in advance. However, there is the risk of lost offers should a cash offer fall through before the close. The generally lower risk of a cash sale may also mean receiving a slightly lower price on the sale.
Owner financed sales and stock swap transfers generally carry greater levels of risk. With an owner financed sale, the business itself often acts as the means of security. But, if the purchaser can’t afford to make the payments because of driving the business “in the ground”, you may find yourself repossessing a business with significantly lower value than the original sales price or even no value depending upon the damage done by the purchaser.
With a stock swap the risk may be slightly less than an owner finance, but it is still more risky than with a cash sale. This is because your sale value is in the stock of the company that purchased yours. These types of deals usually occur with slightly larger, more stable companies that have the extra revenue or stock value to be purchasing your business. But remain mindful that any company can go under, even a larger, historically more successful one.
Other Exit Considerations
It’s not uncommon for us to receive a call from a business owner for feedback regarding decisions already being made about their business exit. And, while we’d certainly encourage anyone in the process of exiting their business to contact us for guidance, the best time to plan your exit is well in advance. How long is “well in advance”? Certainly the longer the better. But some of the most successful business exits we’ve assisted with occurred when we had been advising our clients for many years regarding every aspect of their business. So, contact us today to begin strategizing your exit whether it’s already underway or decades ahead!
Our Other Divisions
CPA / Accounting
Financial Planning
Investment Advisory
Venture Capital
