BUSINESS OWNERS: KNOW YOUR OPTIONS BEFORE YOU SELL

Aaron Johnson
4 min readSep 19, 2020

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You’ve worked hard over the years in order to build a successful business. You took all the risk, worked through countless nights and perhaps even mortgaged everything you owned to get it started in the first place. At some point it’s only natural to ask, “How can I convert my business into cash?” or “How do I create personal wealth from my business?”

Asking those questions is a signal that you should begin learning about exit strategies. Whether you run a business that is worth $100 million or $1 million per year, identifying and evaluating your options can provide you with clarity as to your next steps.

Whether you are exploring the possibility of selling your business or of going public, the starting point is the same: you need to ascertain the value of your company. Depending on the size of your company, you may be able to use a local accountant for the valuation. These cost vary depsnding ont eh siz an complexity of the business. If the size of your company requires you to use a large accounting or banking firm to do the valuation, it could cost as much as $30,000 or $40,000. This is money well spent; you need a good estimate of your company’s worth before you think about taking it to market.

There are five basic options available to business owners who wish to cash in on their business investment. Each option, of course, has advantages and disadvantages.

· Sell the company to family.

Pro: Emotional fulfilment from the knowledge that your heirs will continue what you started. You can also structure your payments in installments that can help you eliminate paying an exorbitant amount of tax in a lump sum.

Con: You still may have obligations to the company, at least in an advisory role. You also can lose the opportunity to realize future value.

· Sell the company to a third party such as a Private Equity Firm.

Pro: You usually will receive a large cash payment in one lump sum and can walk away with no strings attached.

Con: That lump sum can bring with it enormous tax consequences, and you lose the opportunity to realize future value.

· Sell the company to management.

Pro: Greater flexibility in structuring your compensation and your role in the company than when selling the company outright to a third party.

Con: Management can rarely afford to buy the company from you for a lump sum. They may have to structure a long-term deal with you. This could mean that you’ll have to stay involved in running the company.

· Employee Stock Ownership Plan (ESOP). Generally, through this kind of program, you sell qualified shares of the company into a trust. These shares ultimately are allocated to the employees, who become the owners of the company. Avis Car Rental and United Airlines are two large corporations that are employee-owned.

Pro: Proceeds from the sale of stock fall under Internal Revenue Code Section 1042; as long as the proceeds are invested in U.S. stocks and bonds, you don’t have to pay capital-gains tax until you dispose of the replacement property.

Con: It takes years to establish the plan and sell all the shares into the trust. There are also ongoing expenses for the maintenance of the program.

· Initial public offering (IPO).

Through an underwriter, the business owner sells stock in the company to public shareholders.

Pro: IPOs typically raise large amounts of capital for the business owner.

Con: The business owner faces heavy, quarterly pressure from shareholders to maintain profit margins and thus maintain the value of the stock. There is also uncertainty about the market conditions for the offering, and there are considerable initial and ongoing expenses.

This is just a thumbnail sketch of the options, and not every option applies to every business situation. To determine which is the most viable for you, it is important to establish goals for yourself and for your business. Does it matter to you whether the company continues to operate? Do you want your children to take over for you, or would you prefer to sell the company outright?

Once you have made some decisions about the company, you should examine your investment portfolio with your financial advisor to make decisions about your estate planning — such as how much to leave to your heirs, what tax ramifications should be considered, and whether you need to produce additional income now.

Deciding to sell a business to which you have devoted years of your life can be a difficult process. There seems to be an endless stream of financial, social and emotional issues that require consideration. Consult an accountant, a financial advisor or a legal advisor — their counsel can help you make an informed decision.

Provided by courtesy of Aaron Jousan Johnson, Managing Director with JCAP Group in Darien, CT.

Our firm does not render legal, accounting or federal or state tax advice. Please consult your CPA or attorney on such matters.

The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of JCAP Group, J. Capital, or its affiliates. The material is distributed solely for informational purposes with no fee and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy.

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