Options for Transferring to Family or Employees
When considering your options for exiting your business, many owners look to transfer to family members or existing employees. The desire to leave a legacy for those who have been with you all along may outweigh your desire for a big payoff if you found the right strategic buyer. While this may check a lot of boxes on your list, there can be some challenges with this strategy.
Here are a couple things to think about if this is your plan.
First, is your kid/nephew/sister/employee qualified to run your business? It is critically important to make sure that the individual or individuals are qualified to continue the success you’ve had to date in the business. Contractor Succession works with potential leaders to help maximize their abilities to allow the business to thrive in the future.
Second, how does an owner guarantee they have enough money to retire on when they transition their business to an individual or individuals with limited resources? There are several parts to this question.
Part 1 involves the need to “lock-in” those key employees or family members for the long haul. One way is to develop a “phantom stock” plan where employees are granted a number or percentage of stock shares in the company at a future date. Oftentimes, it can be structured as an “earn-in” where the employee is trading sweat equity for future shares of stock. At the designated time, the phantom stock converts to actual stock and the employee then receives the benefits as well as the tax obligations of a real stock owner. Until that time, the stock has no real value and if the employee leaves the company or is terminated, the stock reverts back to the original stockholders. This plan helps to guarantee the long term commitment of key players but doesn’t address their financial capability to purchase the company.
Part 2 can involve the utilization of different types of life and disability insurance to create a pot of money to help with the purchase of the company from the owner by key, designated employees. While there are numerous legal and tax implications associated with these transactions, this methodology has been used successfully for years and is a great way to help facilitate an internal purchase.
In all of these scenarios, Contractor Succession has the team assembled to help implement these strategies for a successful transition. Contact us at 833-4U2-EXIT or check out our website at www.contractorsuccession.com.