A recent article in National Driller magazine, “How Can a Driller Ever Retire? ESOPs May Help,” highlights the fact that business transitions are an issue across industries in the U.S. And while many people think they may sell their businesses externally, an internal transfer or sale may provide a better option for owners to achieve their financial and non-financial long-term goals.
An internal sale can be beneficial for both financial and non-financial reasons:
- Taxes and fees can be minimized.
- Lower advisory fees.
- You have a built-in buyer and a higher probability of successful transition
- The owner can remain involved with the company in various capacities.
- Continuity of the business and legacy can remain intact.
- Internal options enable owners to reward key managers, employees, or family members who are involved in the business.
Internal Sale Options
While the National Driller article addresses one internal sale option for owners—the Employee Stock Ownership plan or ESOP—there are other internal sale options that owners can consider. Let’s discuss some of these options.
An ESOP is created when a sole owner, or family of owners, wants to sell all or a portion of their company’s shares to a trust for the benefit of ALL of their employees. The major benefits of an ESOP include preferential tax treatment and ALL of the people who helped build the company are included in a new, qualified retirement plan. The owner also gets to transition out gradually while leaving in place the people who know and care the most about the future of the business.
Many owners may look to their management team and think that the transition out of the business may best be handled internally and privately by selling to managers. Because they are already part of the company, many owners are willing to give the managers this option on the condition that they can learn to effectively run the company so there are profits to facilitate the transaction.
Gift or Sell to Family Members
Owners can transfer ownership of their businesses to their children or other family members by either selling or gifting shares. But that is only the first step. True business succession requires a whole lot more than a piece of paper transferring title - it needs careful planning, time, communication, training, mentoring, and most of all, the selection of the correct successor.
The internal sale can provide some great advantages over the external sale but still requires advance planning and preparation such as identifying and preparing a successor and being sure the business and owner are ready for the pending transition.
Since there are several types of internal sale methods, the best structure needs to be identified in order to achieve the owner’s financial and non-financial goals and objectives. Therefore, we recommend you begin this process 3 to 5 years in advance of your desired transition date. Developing a Business Ownership Transition Plan not only provides owners with the roadmap they need to achieve their own goals, but it also can provide incentives and a plan for the next generation of company leaders.