At some point, every business owner leaves the company, either voluntarily through retirement or otherwise. Some businesses will outlive their founders. Others can’t survive without the continued involvement of a key owner-employee. And a few business concepts – from horse-drawn buggies to video rental stores – eventually lose relevance. Here’s an overview of the options for owners in this phase of the business lifecycle.
Selling the Business
Many owners cash out by selling their business interests to the remaining owners, family members, employees, private equity firms, competitors, or other outsiders. A sale provides owners with cash flow to fund retirement and pass along to their heirs.
Steps to make your business sale-ready may include:
- Divesting less-desirable assets,
- Buying out difficult shareholders,
- Trimming excessive overhead costs, and
- Transitioning customer accounts to employees who will continue working for the business after the deal closes.
Your professional advisors can help position your business for sale and maximize the selling price. They can also help identify potential buyers, compile financial documents for prospective buyers, set a reasonable asking price, and recommend alternative deal structures.
After closing, buyers might ask key owner-employees to continue working for the business as an employee or consultants. These arrangements are usually temporary and go hand-in-hand with a non-compete agreement and/or an earnout provision, where a portion of the purchase price is contingent on the company meeting certain financial benchmarks in the future. It’s important to understand the tax obligations associated with these arrangements – they may be treated differently than capital gains from sales proceeds.
With a professional management team in place and audited financial statements, larger companies might be positioned to make an initial public offering (IPO). This can be a daunting endeavor, but an experienced professional advisor can help navigate the details.
When contemplating an IPO, it’s important to carefully estimate the costs associated with going and being, public. Beyond the initial registration costs, publicly traded companies are subject to extensive ongoing filing and disclosure requirements with the Securities and Exchange Commission.
When a mature business’s performance starts to decline, it can potentially be saved with a turnaround (or reorganization) plan. Reorganizing can provide a fresh start, especially in today’s volatile economy. For instance, management might:
- Renegotiate debt terms,
- Close unprofitable segments,
- Refocus on core business operations, and
- Revise its marketing strategy.
Professional advisors are central to an effective turnaround. They can help you get the business back on track by creating short-term cash flow projections and monitoring progress. Real-time tracking allows you to pivot as needed and proves the odds of success.
Once a turnaround is successfully completed, the business could be positioned for a sale. Conversely, failed turnaround attempts may result in a distressed business sale or an asset liquidation.
Some businesses are no longer viable. In this situation, the owner will need to sell assets, repay creditors, and wind down operations. This includes filing final tax returns.
Selling assets at auction is usually the method of last resort because you’ll receive pennies on the dollars you’ve invested. Professional advisors can help liquidating businesses find competitors, suppliers, and even customers who might be willing to buy the assets for a fair price. When creditors are involved, liquidation might require a formal bankruptcy proceeding. Your advisors can guide you through this process.
Ask the Pros
Businesses need guidance from experienced professional advisors as they mature and evolve. Sometimes long-term plans may need to be revised as market conditions are owners’ personal circumstances change. If you haven’t done so already, discuss exit strategy options with your tax and legal advisors. They can help determine the optimal path based on your business and personal situation.