What is Your Ownership Transition Timeline?

What is Your Ownership Transition Timeline? by an ESOP Advisor.

You’ve owned your business for years. You’ve grown it, nurtured it and now the time might be approaching for you to move on. After so many years even if the thought of transitioning your business hasn’t entered your mind, it is time to start planning for ownership transition. As a business owner, the earlier you determine your unique ownership transition timeline, the more options there are available to you. Planning allows you to have control over the process, letting you better plan for both your personal future and that of your business.

The bottom line is that you need a plan and you should start the timeline development process now.

Closely held business owners should begin the planning process by determining their ideal ownership transition timelines. They should assess their desired degree of ownership of their companies over the periods of the next three, five and 10 years. The owners should also determine to what extent they want to remain involved with the management of their companies during and following these timeframes.

Some owners might want to exit their companies in less than a year, while others might plan to transition their businesses over a five year timeline. The possibilities are as varied as the companies themselves, and unique to each owner and situation. Whatever the chosen timeline, companies are well advised to seek counsel from experienced ownership transition planning specialists such as Prairie Capital Advisors, Inc.

“Business owners come to us because they want to know their options and then determine the best course of action for their particular situation,” said Kenneth Serwinski, Senior Managing Director for Prairie Capital Advisors. “We start by helping them develop their timelines – where do they want to be in five years? Ten years? On the golf course or in the boardroom? Regardless, the sooner the planning process starts, the more alternatives we can present to each owner.”

Closely held business owners who want to completely exit their businesses quickly might have fewer alternatives available to them. For owners who choose to exit their businesses in one year or less, often the best alternative is a sale to an external party. Ownership transition planning specialists can work with closely held business owners to find interested buyers, as well as provide valuation services to best position the company for sale.

For such abbreviated ownership transition timelines, recently there has been a trend to accomplish 100% Employee Stock Ownership Plan (ESOP) transactions, but owners might be constrained by the capital required to do so. If a business owner opts to exit through an ESOP in a shortened timeframe, then the business owner’s support is especially critical in order to consummate the transaction. Support from the business owner will come in the form of either a seller note or guarantees.

“If closely held business owners plan to exit their company in five or 10 years, for example,” explained Serwinski, “They can use an ESOP alternative and receive a percentage of their company’s value now and the remaining value five years down the road as they transition to a part‐time basis. Furthermore, an internal recapitalization can be consummated in a short timeframe due to the fact that it is an internal negotiation.”

When closely held businesses transition via an ESOP, the owners often remain with the business for some time to train the new management to eventually run the business, as well as to assist in the development of the company’s business strategy. A management buyout is another form of internal recapitalization that doesn’t require closely held business owners to completely relinquish control of the company.

“If a business owner takes the time to plan ahead and weigh the different ownership transition alternatives, the options can vary based upon how much control the owner wants to relinquish,” said Robert Gross, Senior Managing Director for Prairie Capital Advisors. “A management buyout is a good option for the owner who wants to retain some control.”

With a phased management buyout, closely held business owners aren’t relinquishing control, but they are setting the stage for the management team to take control of the company over a long period of time. Implementation of a management buyout can begin in three to six months because closely held business owners do not have to rely upon the marketplace to create a transaction – the transaction is controlled internally. Depending upon the structure of the transaction, some cash may come to the seller immediately with the balance paid over time.

“With an ESOP or management buyout, it is important to recognize these are usually phased transactions,” said Gross. “It most likely isn’t a 100 percent sale in the first transaction. Plus, closely held business owners have to incorporate the time necessary to accomplish the transaction itself.”

Finally, one of the limiting factors for closely held business owners is the quality and depth of the management team below them. This might limit the ownership transition alternatives available to them. It’s important that closely held business owners know they need a management team with the aptitude to operate the company independently. An ESOP works better if there is a qualified management team in place.

By determining the ownership transition timeline sooner rather than later, a business owner reaps the benefits of having a wealth of options available. With the necessary planning, the owner – and the company itself – will benefit from greater control over the future of the business. “The question for the closely held business owner is, as you consider all of these factors,” said Serwinski, “What is your ownership transition timeline?”