sell family business, estate planning, san antonio

The sale of a closely held business is one of the most important and difficult transactions.
There are numerous strategies in selling a business, each strategy has tax, legal, and other consequences. Your particular situation and personal preference will dictate the most advantageous way to sell your business.

No matter what route you ultimately choose to take, make sure to seek qualified counsel along the way. You should expect to engage a business appraiser, CPA, business attorney, financial advisor, and possibly a merger & acquisition (M&A) firm.

Keeping it in the Family
Many small businesses owners have a desire to keep the business in the family. It is important to remember that for this to even be an option there must be both a willing and able child to run the business. When keeping business interests in the family, more so than other strategies, there is a high chance for social conflict inside the family. Although a common goal, it is important to keep these statistics reported by The Family Business Institute (2007):

•   More than 3 in 10 family businesses survive into the second generation.
•   Around 12% of family businesses are viable into the third generation.
•   Only 3% of all family businesses operate into the fourth generation and beyond.

Generally, when keeping business interests in the family, maximizing value is not the primary concern. Focusing on succession planning and tax mitigation is usually the primary concern.

Sell to Employees
Who knows your business better than your key employees? Customers already are familiar with, and rely upon them. The value of a business can be diminished when a change of ownership takes place. Selling to existing employees usually has the least impact on the business functions, relationships, and value. Like with keeping business in the family, selling to employees reassures the selling business owner that things will remain relatively the same after their departure.

There are serious impediments to selling to existing employees. Most of the time, your employees do not have significant enough assets to purchase the business outright. Additionally, great employees don’t always make great owners. Because the selling owner oftentimes must remain financially involved after the sale, this option should be carefully considered.

Selling to existing employees is best executed when there is significant lead time (years) before the owner exits the business for good. There are many ways to conduct this type of transfer such as Using some of these methods have very complex tax and legal considerations. Having good counsel for this type of sale is critical. You will find brief descriptions of a few of the transfer strategies below.

Sell to Third Party
It is nice to imagine that when the time comes to sell your business there is a buyer waiting with plenty of cash to purchase your business for what you think it is worth. In reality your business is a very risky and illiquid asset. A buyer may want to purchase your business for many different reasons. They may already own a business and your business may compliment or compete with yours. They may be investors who believe they can grow the business or simply want to run an established business.

Public companies regularly disclose financial statements, earning guidance, business objectives and outlook. Although these things are understood by most business owners about their own business, rarely are they so well organizes. Potential buyers who do not have a clear picture of what they are purchasing are reluctant to pay full value. Purchasers after all, are taking a huge risk in purchasing a business they may not be intimately familiar. It is important to evaluate all aspects of your business. By providing a clear vision of the operations, financials, marketing, and culture you can assure buyers of what they are purchasing and maximize the sale price.

If selling to a third party is the most advantageous way to sell your business, the use of an M&A firm might be useful in making the business attractive for sale and assistance with finding and negotiating with a potential buyer. Be careful in selecting a company in this area as there is no official regulatory body or training required. The cost of hiring an M&A firm can be very expensive and the potential for conflicts of interest are numerous.

Transfer Strategies

Stock vs. Assets
When selling a business someone can buy the actual stock of a company or simply the assets of the company. The difference is when the assets of a business are purchased, none of the liability of the company transfers with the sale. The old company ceases to exist, but their customers, equipment, etc are used by a new company. When stock is transferred, the business and assets transfer.

Generally the seller favors a stock transaction for the tax benefits. The gain on the value of stock is a capital gain which is taxed at a lower rate than ordinary income. If the stock is Qualified Small Business Stock (QSBS) then a large portion of the gain may not even be taxable. The buyer generally favors an asset transaction because it can limit the liability for the new owner as well as providing them with greater tax advantages.

Installment Sales
An installment sale is when the buyer puts a down payment on the business and signs a note for the balance. The seller then receives payments until the full note is paid. This has the tax advantage of allowing the seller to recognize the gain as the payments are made. With an outright sale the full gain on the sale of the business would be taxable immediately. The major risk to the seller is that the business fails and/or the buyer is unable to repay the loan amount. The installment sale also has the benefit of “freezing” the businesses value.

Private Annuities
Used primarily as an estate planning tool, private annuities work similarly to an installment sale, except the payment schedule is for the lifetime of the seller. In essence the repayment schedule is over the expected lifetime (actuarial) of the seller. If the annuitant (seller) lives longer than their life expectancy the seller would come out ahead. If the seller dies prematurely the buyer would benefit. If the seller has poor health this technique can be used to lower the cost of transferring the business to children through estate planning.

Employee Stock Ownership Plan (ESOP) or Leveraged ESOP (LESOP)
ESOP’s and LESOP’s can be used as an employee incentive or way to sell your business to employees. Shares of ownership in the company are paid to employees (in lieu of additional compensation). Over time, the employees gain increasing ownership in the company. The ESOP can be placed inside a retirement plan to maximize tax efficiency to employees. The business must have strong consistent cash flow and profitability to institute an ESOP. In essence, the ESOP allows employees to purchase ownership by lowering their salary to purchase ownership.

The business can borrow money to purchase shares. The seller generally must cosign on the bank business loan, but allows for seller to sell the whole business all at once. The major disadvantage of an ESOP is that they are very expensive to setup and maintain. The company must be valued each and every year. The cost of record keeping and appraisals can easily cost $10,000 or more per year.