Within 10 years, 76 percent of business owners intend on exiting their business. A promising family member, younger partner or member of the management team may be interested in buying the business but may not have the financial capability to purchase it at the valuation price. Julie Keyes, Certified Exit Planning Advisor at KeyesStrategies, LLC, and entrepreneur, shares her strategic planning insights on how to help your selected heir/buyer finance the acquisition of your business at an equitable price.
Building Successor Equity
The more time you have for this the better. Start investing in an equity account on behalf of your potential successors. Rather than paying a cash bonus, allocate those funds to a deferred compensation account to build a down payment. Deferred compensation comes in many different forms. A few of which are stock transfer, phantom stock or corporate investment account.
SBA loans are a common financing option for buying a small business. The SBA will require a minimum of five to 10 percent of the purchase price as down payment, provided the borrower and the business meet other underwriting criteria. For example, they will vet how qualified the buyer is in running a business and how much industry knowledge they have. Many times they will allow a seller to carry a small portion of the financing on behalf of the buyer, but they may also require repayment of their loan before they’ll allow your note to be paid off. You can expect a loan between 70-75% of the purchase price, with the remainder coming from the buyer and possibly the seller.
Understand how to Structure a Deal
In many family business sales, when there’s no bank loan involved, you receive very little of the price up front, with the majority of the purchase price coming to you in the form of ongoing installments. This type of deal structure may create an undue risk to you, if you are relying on these payments to fund your retirement, it’s best for the buyers to have some skin in the game, especially if they end up needing financing down the road. Some buyers may invest their own personal assets into the transaction. Others work out a deal with the seller by continuing to be involved in the business as a consultant, sales representative or member of the Board to help ensure their company remains strong and profitable, at least throughout the buyout period.
Incorporate Best Business Practices Now
Sometimes owners think selling to family members doesn’t require they work to improve the business before they transition out. If you want more free time and less hassle with running the day to day of the business, it’s essential to implement a growth and improvement plan, with a leadership development strategy in place as well. The sooner you make these changes, the smoother your eventual transition will be, and the more fun you can start having in your Next Act!