Kerry Withrow, a financial advisor and part of “Business Exit Planning Advisors” (BEPA Team) and RBC Wealth Management-U.S’s Corporate and Executive Services division, has seen an uptick in business owners who are looking to sell, liquidate or transition their privately-held businesses. Withrow and his team work with business owners to help guide and educate them on the different ways that they can exit their businesses. Withrow is a certified exit planning advisor.
What is exit planning?
Exit planning is the preparation for the exit of an entrepreneur from their company to maximize the enterprise value of the company in a mergers and acquisitions transaction and thus their shareholder value, although other non-financial objectives may be pursued including the transition of the company to the next generation, sale to the employees or management, or other altruistic, non-financial objectives.
According to the Harvard Business Review, in the next 10 years it is estimated that more than 50% of the privately held businesses in the United States will be transferring ownership and as many as 75% of business owners do not have an exit plan. Due to the pandemic and current economic conditions, many business owners are looking to lock-in higher multiples while their profit margins are still high.
Exiting a business that’s been built and nurtured over the years is not a simple task – financially or emotionally. Whether an owner transfers their business to family members or sells it to existing management or a third party, assiduous planning is critical.
What do business owners need to know about selling their company?
Business owners starting to think about retirement often consider gifting the company to family members or finding an outside buyer, such as a private equity firm or industry acquirer, willing to meet their asking price.
Many owners, however, overlook another appealing option – selling the company through an ERISA qualified retirement plan, an Employee Stock Ownership Plan, or ESOP.
What is an employee stock ownership plan (ESOP)?
An ESOP is an employee benefit plan that enables employees to own part or all of the company they work for. ESOPs are most commonly used to facilitate succession planning, allowing the company ownership to sell their shares and transition flexibly out of their business.
An ESOP can be a great way to exit under certain circumstances. An ESOP is a unique way for a business owner to exit or sell their business in the most tax-efficient way. An ESOP allows a business owner to sell and not pay capital gains taxes from their sale by qualifying for a tax-free rollover under IRS Code Section 1042.
In addition, an ESOP allows an owner to maintain control and operate their company in the most tax efficient manner. Often times, an owner who sells their company to an ESOP will receive the highest proceeds, net of taxes.
What types of businesses can use an ESOP?
Common industries are manufacturing, professional services, finance, insurance, real estate, construction, wholesale trade retail trade, and architectural companies. The recommended minimum size is for a company to have at least $1,000,000 in annual profit or annual profit. Lastly, it is important for a business to have succession for the selling owners, whether that is family members or key management.
We’ve seen a lot of inquiries about ESOPs because competition for talent remains fierce, also known as “The Great Resignation.” Employers are scrambling to find talent and more importantly keep their current workforce motivated. According to the National Center of Employee Ownership (NCEO), ESOP companies were 3 to 4 times more likely to retain staff, and found productivity increases of 4-5% on average the year the ESOP was adopted.
If you are a business owner, majority shareholder or a family-owned business and have found this article interesting, you can send the Business Exit Planning Advisors an email at BEPA@rbc.com.
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