If you have been managing your business for a number of years now you might be considering an exit strategy. But doing so takes planning. How will you get your money out of the business? How much will you take out? Will you liquidate company assets or transfer ownership to someone else? How long do you intend to stay engaged in the company’s daily operations? Will you be able to relinquish control to others?
If you take the time to deliberate, you will be in a better position to choose a reasonable — and profitable — exit option.
The benefits of this option are simplicity and speed. You advertise the company’s equipment, land, inventory, and other assets and accept the highest bidder. After any creditors are paid off, you walk away with the offer of capital gains from the sale of the business.
“Different types of business assets sold can be taxed at different rates, points out Associate Partner Mike Engleman, CPA. “The buyer and seller usually agree on what portion of the sale price is allocated to each asset. You should consult with your CPA in allocating the sales price.”
However, the biggest disadvantage is a possible meager return on investment. Second-hand business assets often fail to fetch a decent price in the market. In addition, goodwill value is lost when you liquidate.
“Another disadvantage is the possibility of some of the gain on asset sales being categorized as recapture and subject to ordinary income rates**, explains Associate Partner Rich Middleton, CPA. “If incorporated, sell the stock. In certain circumstances, a transaction can be treated as a stock sale for the seller and an asset purchase for the buyer.”
This option can work well if you have a team of committed employees who are eager to make the business succeed and are intimately familiar with company operations. If you choose this option, consider remaining available in an advisory capacity to ensure continuity during the transition.
“An Employee Stock Ownership Plan (ESOP) is a great way to pass the business to your employees,” adds Rich. “This can only be done if your entity is a “C” or an “S” corporation.”
Depending on your family dynamics, this can be a viable option. Make sure that your relatives possess the knowledge to run the company effectively and will ensure existing employees are treated fairly.
Other exit strategy options include acquisitions, mergers, and, in rare cases, taking the company public through an initial public offering. Regardless of the strategy you select, assembling a team of impartial and experienced advisors is essential. At a minimum, the advisory team should include an attorney skilled in business sales and your accountant who can prepare accurate financial statements and assess tax implications. Other professionals who could provide value to the process include real estate agents and valuation consultants.
If you plan to sell the business, make the transition as smooth as possible. New owners will want assurance about the firm’s long-term financial viability and insight into assumptions behind the numbers. In the build-up to the transition, make every effort to ensure that key relationships remain intact, vendors stay committed, and customers keep coming back.
If you have questions as you plan for your organization’s exit strategy, please call your South Jersey CPA and business advisor. We can discuss the details together.
Contact us for guidance and application to your individual situation →
© MC 2017 | “Business Tips” are published monthly to provide useful business information. The business information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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