Ownership succession options for small business owners merger
One of the first questions business owners ask is when to create a succession plan. The answer is: as soon as the day you become an owner and no later than five years before you expect to implement the plan.
Putting off succession planning until just before you want to exit your business may limit your options for who you can sell to, the value you receive for the company, and the overall success of your transition. Expect your succession plans to change due to circumstances beyond your control, including unexpected life or health changes, market conditions, key employee departures, and change in interest by your intended successors.
Every owner has heard a story from someone who sold their small business for an outrageously large sum of money. While a few of those deals do happen, they are the rare exception. In general, there are six options for an owner when you no longer want to own your company.
1. Move ownership to a family member
In many cases it is the owner’s dream to leave the company they built to their children and keep it in the family for generations to come. But what if family members have no interest in owning the family business? Keep in mind, gifting is often involved in these situations, which means less or even no value to you.
2. Sell to a key employee
When family members are not an option, many owners look to key employees to buy them out. This can be good for the continuity of your business; however, most employees have limited financial resources, and not every great employee is cut out to be an owner.
You or your company may end up financing the deal, as bank financing may be difficult to come by. Can you manage the risk of carrying a loan, or can your company’s balance sheet handle the debt and distributions required for such a transaction? There are some interesting mechanisms available with drop-down LLCs that can help buyers with limited resources.
3. Third-party sale to an individual
Third-party sales can provide good value, but the opportunities may be limited. Individual third-party buyers come from a small pool or have limited financial resources.
4. Merger or sale to another company or private equity group
Merger or acquisition opportunities by other construction companies can also be limited — unless your company owns something a competitor wants, such as key employees, location, technology, or customer relationships. Private equity companies usually look for recurring revenue streams, but most construction companies don’t perform recurring service work.
5. Employee stock ownership plan (ESOP)
ESOPs can facilitate succession planning and provide good value to a retiring owner. However, they can lead to issues with bonding. Bonding is a key component of construction, but as an ESOP, owners are likely unwilling to risk giving a personal guarantee. There is also the question of who will run the company. How will your management team operate in an employee-ownership culture?
6. Sell assets and liquidate
Selling off the company’s equipment, collecting receivables, paying off liabilities, and liquidating your business can be one of the simplest ways for you to leave the company — but it tends to provide the least amount of value to the owner.
No matter what option you choose, the selling price of your company should give both the seller and the buyer the opportunity to succeed. If you are moving ownership to family, you may want to look at straight-up gifting or some combination with a sale. Consider tools such as grantor-retained annuity trusts and intentionally defective grantor trusts to minimize the impact on lifetime exemptions.
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If outside financing won’t work, you may be able to sell to key employees utilizing company loans, distributions, bonuses, or deferred compensation plans.
All transition options have pros and cons. Work with a financial professional to find the one that’s right for you, your company, and your family.
For more information on ownership succession in Massachusetts, contact Mike Utz at [email protected] or 612-376-4802. For more information on CliftonLarsonAllen LLP, visit CLAconnect.com.
