Jay was struggling as he pondered the future. His lawn and landscape business had grown to be one of the dominant landscape companies in the city. He was extremely proud of what he had accomplished in a little over 25 years. He knew that it was time for him to develop his exit plan, but he wasn’t sure what direction to steer the business, JPO Landscape.
Jay had always dreamed of passing JPO Landscape on to his son Adam, but he had some real concerns about that idea. It wasn’t that he didn’t think Adam had aptitude for the business. As a matter of fact, he was pretty sure Adam had even more aptitude for the business than he had had at Adam’s age. His big concern was that nearly all of his wealth was tied up in JPO. He was counting on it to finance his retirement. In addition, he had become quite comfortable with the perks that come along with ownership of a successful business. Jay had been approached a few times with offers to buy his business. Nothing of those opportunities particularly excited him, but he knew that a third party sale would probably come the closest to meeting his financial requirements as he considered retirement.
Many green industry business owners face a similar conundrum. After building a successful business, they would like nothing more than to be able to pass that business on to either a family member or, perhaps, one or two key employees who have contributed to the growth of the business. On the other hand, many business owners have the vast majority of their resources tied up in the business. They are dependent on the cash flow from the business to sustain their lifestyle.
Because the business is so crucial to the owner’s financial plans, transferring the business to an insider may seem like an impossible situation.
- Few insiders would have the liquid resources to buy the business out right at a competitive price.
- A transaction with insiders will usually not produce the synergies that can help command the highest price.
- You can’t really judge the insider’s management skills and commitment to the business.
- You may lose control of the business before you have been completely cashed out and feel comfortable that the business can thrive under the new ownership.
On the other hand, their may be compelling reasons to consider a transfer of the business to a family member or key employee:
- It is a way to “keep the business in the family.” Many business owners yearn to see their heirs maintain the success of the business.
- It can be a way to motivate and reward key employees.
- The business owner may be able to gradually scale back his or her day-to-day involvement in the business during the transition process, while maintaining a level of involvement and control.
- A transaction with an insider will often prove far less traumatic for employees and customers alike.
- There is a possibility to structure a transaction that can be tax-advantaged and yield substantial cash flow to the seller over time.
- Insiders may be more open-minded than third parties to possible alternative structures, such as a stock sale versus an asset sale.
There are a variety of options to consider in structuring an “insider sale.” It can involve a sale of stock, a sale of assets, a step transaction over time and, in some cases, may involve an employee stock ownership plan (ESOP).
Planning the sale of a business to a family member or key employee can be a complicated process and one that will take time to successfully execute. The plan needs to have the following characteristics:
- It needs to meet the existing owner’s financial requirements.
- It needs to be fair to both the existing and new owners.
- It needs to be structured to minimize the tax burden.
- It needs to position the business for continued success under its new owners.
Balancing all of those characteristics is a tall order, but not impossible with a little time, flexibility and the assistance of quality legal, tax, accounting and transaction advisers. With time, planning and the right advisers, business owners like Jay often have the opportunity to meet their financial objectives while also achieving their non-financial goals for the transition of the business.