Business Owner's Playbook - The Hartford

The Transitioning CompanyFinanceConversationStartersHelp your advisors helpyou by asking them . . .■ How do I determine if mybusiness is ready for atransition? How do Imake it look mostattractive for sale?■ Should I expect toreceive a lump sum orearn out?■ How can I retain keyemployees during thetransition?You might be ready to sell or pass your company to your heirs; what typeof transition is right for you and your business?Type of Business TransitionsTransition Possible Benefits Some ConsiderationsSale to Another CompanySale to Employees (ESOP)Many small business ownersdevelop strong ties to theiremployees; If you feel this way –or if your company looks like itwould be a hard sell to outsidersbased on market conditions orthe kind of industry you’re in –you can sell it to your employeesthrough an Employee StockOption Plan (ESOP) (see TheGrowing Company, Compensation& Benefits.) You can transact thesale through an existing ESOPor set the plan up expressly forthe transition.• Usually a company familiarwith, and successful in, yourindustry.• Financial benefits to you andyour employees.• You’ll realize tax benefits withthe ESOP using tax-deductiblecorporate earnings to buystock from the owner.• Capital gains tax on the saleis deferred.• Employees know the businesswell and usually have strongties to the company.• What happens to youremployees? Are theyabsorbed, moved or outof a job?• Most such transitions takeseveral years.• Employees can be reluctantto make changes.• Not for small mom-and-popshops; usually forcompanies whose salestotal in the millions.Sale to Family Member(s)• You know the buyer – littlerisk for surprises.• Usually someone who knowsthe business well.• Often difficult to mixfamily and finances,especially when thereis not an equitabledistribution betweenfamily members.Sale to Co-owner(s)• You usually know thebuyer(s) very well.• Usually someone who knowsthe business well.• More difficult transactionwhen co-owners are familymembers.Can change friendships/relationships posttransaction.But, first, find out if yourbusiness and you are ready.As much planning as it took tostart your business, that much –if not more -- planning should beput in during a time of transition.There are many things to reviewwith your accountant before thefinal disposition of your business,whatever it might be. An accuratevaluation of privately ownedcompanies largely depends onthe reliability of the company’sfinancial information. And, assimplistic as it may sound, youmust be absolutely ready to turnthe business over.Is the business ready?Valuation of BusinessIf you are selling, a valuation willshow the market worth of yourbusiness – a general idea of howmuch you can expect to get froma buyer. A valuation is typicallydetermined by an accountant, alawyer specializing in businesstransitions, an investment bankeror a business appraiser. Whoeveryou use, make sure they belongto, and adhere to the policiesof, one of the three major U.S.valuation societies: the American30