This is a difficult, but real question that all business owners must think about and be prepared for. There are really only a few options available for an owner of a business wanting to retire: Sell the business to a third party, to your children, to an employee, or take the business public. Whichever method should you choose, it is essential that you take the time to properly plan and discuss your options with experts who specialize in these matters.
1. Selling the business to a third party.
This can be a desirable method of retiring if you are able to realize enough funds from the sale for your retirement. You must do very careful planning in order to make the most out of the sale. In some cases it may take a few years to restructure your business in order to maximize the tax savings. Too often tax savings are lost because there was not enough planning before the sale. Be sure to have advisors who are very knowledgeable in this area in order to get the best results.
2. Selling the business to your children
• Keeping your business in the family can be great, but it comes with many obstacles. Most likely, your child does not have enough money to purchase your business outright. There are numerous ways you can structure this type of transaction all with their own challenges, so make sure you do your research and find out what will work best for your situation.
3. Selling the business to an employee
• If you go with this option, you need to be absolutely sure the employee who will be taking over your business is the right person as they will be in charge of your retirement fund. This can be similar to passing on your business to your children, as the employee you pick will most likely not have enough money to buy the company outright. The first step in this type of transaction would be to start by transferring a small interest in the business to the employee with your employee having an ability to eventually buy you out. By doing this you will be creating a large incentive for the employee to stay in your business. There are a number of ways to give shares to employees and still retain control and flexibility. One way is through a shareholders agreement (sometimes called a “buy/sell agreement”), which would provide certain rights to the majority shareholder. This would allow for a less risky transaction if the agreement does not work out for one reason or another.
Written by Midland IRA, Inc. Questions? Contact (239) 333-1032 or (312) 235-0300.