The majority of business owners that are planning to work less in the future and transfer their business to others prefer to have insiders take over rather than sell to an outsider. Fortunately, many of these owners have co-owners, key managers, or family members that are capable of running the business or can be groomed to do so over time.
On the surface, internal transfers seem like a straightforward and simple strategy, but there are a lot of moving parts, and without a plan, there is a real chance for these transitions to fail. With the right planning however, internal transitions can be nicely customized to fit the situation and enable the transitioning owners to achieve their goals.
Here are some examples that demonstrate the flexibility of internal transfers. With our assistance, each one of these owners now has a plan in place to achieve his or her goals, minimize taxes, and net them enough money to live for the rest of their lives:
- The majority owner of an equipment installation and service company wanted to step away from his business within 12 to 24 months and have his minority co-owner, as well as two key managers, take over the ownership and daily operations.
- The sole owner of a distribution business wanted to sell his business to a loyal and key manager and walk away within six months.
- An owner in his late 50s wanted to transfer his service business to his son slowly over the next eight years while continuing to work and save for retirement.
- A 50-percent owner who had already stepped away from the business for personal reasons wanted his co-owner and two key managers to buy his shares of their installation and service company for a fair price.
This is just a sampling of the different situations we have encountered that were all addressed by developing a business ownership transition plan that was customized for the owner’s needs.
Contrast this result with the high 75- to 80-percent failure rate of selling externally, and it builds a strong case for transferring ownership internally. However, owners would be wise to consider this option well in advance of their desired departure date for many reasons. Chief among them are the following.
1) They may need to groom their successor(s) to take over.
2) Business profits need to be high enough to support the buyout in a reasonable period.
3) Tax planning must be done well in advance to minimize taxes on the ownership transfer.
4) Unplanned events inevitably arise that can often be addressed if there is time.
The good news is owners have a strong chance of achieving their goals with a well-planned internal transition plan that is customized to their situation.
