Six ways to preserve your company’s legacy through succession planning

Day-to-day operations take up most of a business owner’s time; yet, what would happen if you were unable to run your business or wanted to pursue other endeavors?

Succession planning is a critical process that involves preparing for the transfer of leadership and ownership of a company. Below we highlight the importance of aligning personal financial goals with business strategy and exploring different succession options, while weighing the pros and cons. Here are six “exit doors” in business succession.

Sell to a strategic buyer: By taking this path, you may get more than fair market value or a “strategic premium,” which benefits you financially. However, the acquiring company may be buying you out to reduce competition, potentially leaving no option for you, your management team or employees to continue with the company. This is a good route for those who want to exit quickly, for maximum valuation and liquidity.

Obtain a financial buyer: A private equity (PE) firm will pay market value for some or all of your business. The sale will provide fast liquidity and could give you continued control if the firm asks you to stay on in some capacity. But keep in mind that your visions for the business may not align. The PE firm’s goal will be to maximize the company’s value for its own exit.

Sell to a selected management team: A management team buyout is a good route for managers and owners who want to maintain business continuity and remain involved on some level. The business may have to borrow to fund your liquidity and then repay the loan out of its earnings. This maintains the ability for managers and owners to run and grow the company.

Keep it in the family: Selling or giving your company to family members is a popular option for many business owners, especially if one or more family members have been working for the company. If maintaining your business’s legacy as family-owned and operated is important to you, this choice may be the best fit. After an independent valuation review, you could take advantage of the lifetime federal gift tax exemption, which is currently valued at $12.92 million, arrange to receive a lump sum, finance the sale directly or draw a salary.

Sell business shares to an ESOP: Otherwise known as an employee stock ownership plan, an ESOP transfers ownership to a trust established to benefit employees. Employees can cash out those shares when they leave the company or retire. This route has unique benefits, including a tax advantage wherein you can defer capital gains taxes on the sale of the business. This strategy also allows you to reward employees, which could help reduce turnover, boost productivity and attract top talent. This is a highly regulated exchange, so make sure you plan carefully and tap the right legal, accounting and financial experts to shepherd you through the process.

Go public: With an initial public offering (IPO), you’ll potentially receive a substantial payout, and your company can begin selling shares of stock to the general public. However, to ensure demand for your company’s shares, it needs a unique value proposition to stand out and entice investors. This strategy can be appealing for large business owners but less viable for small and mid-sized ventures. IPOs are time-consuming, so be sure to examine all the requirements and steps before going public.

Succession planning takes dedicated effort and is a critical step in ensuring the future you want for yourself and your business. As you start the planning process, consider these options and what is best for you and your company.

Editor’s note: Brad McBride is a Vice President and Senior Relationship Manager within the Arkansas Middle Market Commercial Banking group at Bank of America. The opinions expressed are those of the author.