The United States Small Business Administration defines a “Small Business” as generally one with less than 500 employees. Of the approximately 29 million businesses in the United States, 99% are, by definition, a small business. Ohio has approximately 927,000 small businesses representing 98% of all companies in Ohio, and those companies employ 46% of the Ohio workforce. A recent study published by Babson College estimates that more than 50% of America’s small business owners are over the age of 50. Do they all have an exit strategy?
Entrepreneurs are passionate advocates for their customers, their products, and their creative ideas. They work untold hours and sacrifice time away from family and friends to build and deliver their business dream. At times, business management takes a back seat to entrepreneurial creativity. Business owners may want to consider taking the time to plan for their exit from the business.
Plan for an Orderly Exit
Many small businesses will continue on by transitioning to subsequent generations of the founders. Even in the transition of a “family” business, it is in the best interest of the family members to have clearly documented terms and conditions that control the transfer of management and ownership of the company.
If there is not a family heir or trusted employee to take over the reins of a small business, eventually the owner will be confronted with closing and liquidating the company or finding a buyer to purchase the business.
However the business owner manages their exit from the business, there are important considerations which will maximize economic return, preserve good will, and allow the owner to enjoy his or her well deserved transition.
Key considerations in managing the transition include:
- The time commitment of the owner after any transition or sale
- The net proceeds to the owner from a transition, sale or liquidation
- The tax consequences of the transition structure
- The post transition implications to other family members and valued employees
- The post transition implications to valued customers
- Governmental requirements related to the transition of a business
Having a comprehensive transition plan will assist business owners in wealth retention and stress reduction.
Be Prepared for the Unexpected
In addition to managing to a planned transition point from the business, owners need to have plans in place when the unexpected occurs. In addition to personal grief, the death or disability of an active business owner can create economic distress for surviving family members, employees and customers. A transition scenario should be in place in the event of an unplanned exit of the business owner.
Key considerations include:
- Transition of management and control
- Estate planning
- Life insurance coverage
Plans can be developed even for unexpected events and occurrences.
Referencing an old adage, the best two days of owning a boat are the day that you buy it and the day that you sell it. In many ways, owning a business is no different. With proper planning, the transition out of a business can be even more rewarding than the day it is started.
This information should not be considered a comprehensive discussion of business ownership exit strategies, legal advice, or all that an owner should consider when planning a business exit. Should you wish to discuss exiting a business and its implications, contact an attorney who can provide guidance tailored to your specific situation.