Advantages when transferring a business to key employees or management.
Information presented by Kris Maksimovich, AIF®, CRPC®, CRC®, Global Wealth Advisors, email@example.com, a Member of BEI’s International Network of Exit Planning Professionals™:
Financial security is often the primary reason why business owners look to transfer their businesses to key employees or to management. There are six primary factors necessary in achieving your exit objectives that business owners should consider when transferring their businesses to the next generation of leaders. With proper planning, business owners gain several distinct advantages in terms of financial security including time factor, time margin, tax advantages and values-based goals.
As Exit Planning Advisors, we can help our clients receive the amount of income they want and need—both during and after the sale—by properly structuring the transfer of their businesses, even if the businesses’ valuations do not justify the income provided. Additionally, we can design the transfer so that owners retain control of their businesses during the buyout and until they are paid the full sale price.
Business owners who transfer to management afford themselves the luxury of extra planning time. Having extra time to prepare gives owners options if something unexpected were to happen, such as disability or receipt of a huge inheritance.
If a client does not want to leave the business immediately, we can structure the transfer to take as much time as necessary (typically, 5–10 years) depending on the owner’s goals, the successors’ abilities, and the business’ readiness. This allows owners to exit on their terms, develop new interests, and prepare themselves and the business for life after the sale. It also allows owners to continue collecting salary, distributions, and perks while maintaining control until the transfer is completed.
The time margin is the time that owners spend developing interests outside of the business. An ownership transfer to management gives a sizable time margin to pursue new interests while receiving income and maintaining control.
Transfers to management can maximize tax consequences. BEI has developed an insider sale process that typically reduces the cash flow needed to achieve the owner’s financial security goal by 30-40 percent, compared to traditional techniques.
Business owners who transfer their businesses to family enjoy unique tax benefits. Using these benefits allows us to help owners legally minimize or even outright avoid paying income taxes on ownership transfers to family.
Business owners get the best chance at fulfilling their values-based goals like legacy and culture, benefits to employees, and family harmony. They often choose to transfer to children because it allows them to accomplish many of their value-based goals, including the following:
In successor transfers, buyers are prequalified through on-the-job training and observation. Management is motivated to stay with and grow the company, just like any other owner.
When an owner’s children succeed the owner (rather than a third party), the owner can typically rest assured about his or her successors’ honesty, work ethic, and leadership and management skills.