All of us have watched as the government has budgeted over $2 trillion to banks, insurance companies, federal and state governments, and struggling auto manufactures. Ever wonder where all this money is going or coming from? Of course, we will never see any “bailout” money gifted to support our small businesses, which drive job creation and pay the taxes to support the overall government and the economy. So what are small business owners to do?
In a climate in which stock prices are falling and home values are declining, the key to financial security just might lie in the business itself. Private roofing companies are business survivors who have hunkered down to cut costs, review all efficiencies and drive managers to do more with less. The good news is that our company stock is private, and it’s not directly affected by the public stock market swings that have resulted in the losses in our 401(k) plans.
The largest asset of most private owners is their business, which houses their trapped wealth (equity) and provides the income to support their lifestyle. During this difficult time we need to protect this wealth; have systems in place to drive efficiencies, quality and safety; and lead our company through a critical learning stage.
A larger question is, “What is your plan?” That is, once you are through this period, how do you plan to eventually monetize this asset - business equity - protect your illiquid wealth and move into your next stage of life? The answer is a written exit plan, and you need to begin this process now to position yourself for the future.
Simply put, exit strategy provides a customized, written plan that defines the owners’ personal and financial goals and chooses the best vehicle to transfer and monetize their business and as they move into their next stage of life. The plan puts the owner in control of a process that takes several years to execute. During this challenging business climate, owners will need to concentrate on rebuilding their business’ value, succession and business growth, so everything is orchestrated for the timing of the exit.
This article will concentrate on two internal transfer options: an employee stock ownership plan and a management buyout. (It does not consider an external sale such as an IPO, sale to a competitor/consolidator or a private equity group.)
Let’s talk about the managers who work in your business. About 30 years ago, the lawmakers in the United States assessed that it was unlikely that “rank and file” employees would ever have the chance to acquire an ownership role in a private business. Accordingly, the government provides tax incentives to encourage business owners to transfer a portion of the wealth to the employees. The vehicle is called an employee stock ownership plan (or ESOP).
Now, under this premise, you, as an owner, can trade ownership in your business for cash out of the business in a very tax-efficient manner (corporate and personal tax). And, if cash is unavailable to withdraw from the company, you can take a note and earn interest on your money. You can do this and still maintain your job with financial and strategic control.
Is this a recovery plan? Well, maybe not for the business, but it certainly can be for the owner’s personal balance sheet. You see, other buyers may not be out there to purchase your business today. But that does not mean that you cannot create a buyer (with tax incentives to boot) and begin the process of transferring your wealth to another owner - in this case the ESOP trust.
One Man’s Trash …
A second alternative for your “troubled asset” is a sale of the business to your management team in the form of a management buyout. This is a good choice if you have a capable management team that has the talent to move into the next level and management systems that measure results. In this case it may make perfectly good sense to begin a discussion with your managers about taking an ownership role in the business today.
Think about it - by aligning your interests with your managers, you are able to encourage them to work harder and smarter through these difficult and challenging economic times. When it is difficult to incentivize them with cash, try having them share in your burden of ownership by awarding them some illiquid stock. Then, depending upon how that goes, advance the conversation to whether these owners would like to begin taking a larger role in the future management and ownership of the business.
Many employees may perceive this as a once-in-a-lifetime opportunity to own a piece of the business that they have been helping to build for a number of years. Accordingly, you as the owner should be prepared to share many of the responsibilities of decision making in the business with these managers. Your exit and succession plan will only succeed if the business can run without your presence. You may find that your “troubled” asset is suddenly looking a lot more favorable now that your managers are on board to take over the future management of the business.
So, although the government is not going to step in and bail you out of your “troubled” business, there are some creative ways to establish your own “recovery plan.” Look to the tax code and your management team to establish a creative way to design your own exit from the business. At the very least, examining these options is also good business practice, as it expands your imagination to address the issues that you are confronted with today.
Remember, creativity is still the lifeblood of small business. Begin to get creative about your exit options. Begin to think differently about your business - and your exit - and you will see opportunities for your exit that you never saw before. The key is to understand there are several paths to monetize your business wealth and create a written exit plan to execute and measure the process.