Ready to Retire or Move On?
4 Options for Small Business Owners
When the owner of a small business decides to retire or move on to another business venture, there are multiple options that can be considered. Determining which strategy is best is often dependent on a number of factors that include the owner’s financial goals and the presence of family members or existing employees to take over management of the company.
A few of these options include:
1. Passing business directly to family members
If the plan is to transition the business to the next generation, start planning years in advance to allow time for family members to develop the skills, knowledge and relationships that will be necessary to ensure success. The transition from first to second generation represents a transformation from start-up entrepreneurial business to a more structured organization, so work together to put that structure in place. Part of the preparation to transfer the business to the next generation can include establishing a board of directors that includes professionals who can serve as advisors to the business’ leaders.
2. Setting up a family trust
Another option for business owners who want to keep the business in the family is a family business trust in which shares in the company are transferred via a trust rather than directly to the individual. The advantages include long-term tax advantages and protection for family members against potential creditors. When family members are not prepared to, or interested in, taking over the business, a trust also makes it easier to engage a professional fiduciary to oversee the business.
3. Selling or transferring ownership to employees
One way to gradually transition the company to employees is through an employee stock ownership plan (ESOP). The business sets up a trust to buy and own company stock, then makes the stock available to employees, who can purchase it or receive it through bonuses or profit-sharing plans. One advantage of an ESOP is the retention of valuable, experienced employees when the first-generation owner steps away from the company. Keeping these employees engaged and at the company is one way to ease the transition to the next generation and position the business for continued success.
4. Selling to a third party
If a business owner is considering selling the business to fund retirement, or if there are no other family members to take over the business, selling to a third party might make sense. The third party can be a business partner, a long-time manager or an outside company. Prepare well in advance of the decision to sell to ensure that the sale process goes smoothly and the value of the business is maximized.