Succession Planning: Passing Along Ownership of Your Business
Thinking about leaving the business, but unsure how to retire as a small business owner? These resources will help you smoothly exit the industry and possibly transition to new ownership, no matter the reason.
People close their businesses for a variety of reasons. Some areas include declining revenue, industry change, or other financial problems. In addition, things like partner disputes, burnout, or personal changes can also cause businesses to close their doors.
Many business owners have not thought through their business succession plan. Expecting to retire in the next 5-10 years? It’s time to begin succession planning.
There are many options for who might own your business after you, including family members, key managers, an outside buyer – or your employees. There are several different types of employee ownership than could be a good option as you transition your business to the next stage, including an Employee Stock Ownership Plan (ESOP), a worker cooperative, or an Employee Ownership Trust (EOT).
Types of Employee Ownership
•An Employee Stock Ownership Plan (ESOP) is a employee retirement plan which can set aside or borrow funds to buy the owner’s share of company stock. These shares are put in a trust and given to individual employee accounts that vest over time and are cashed in when employees retire or leave.
•A worker co-operative is a business entity (corporation, LLC, trust) owned and controlled by its members. It is governed by bylaws that address how members join or leave the co-op and how profits are distributed. It operates on the principal of one member, one vote.
•An Employee Ownership Trust (EOT) is a trust that holds shares of a company on behalf of the employees, who participate in annual profit sharing. Unlike an ESOP, an EOT is not a retirement plan.
Why Consider Employee Ownership?
•Selling owners can potentially defer capital gains taxes indefinitely when they sell 30 percent or more of their company to employees via an ESOP or worker cooperative.
•Selling to employees allows you to stay on as President or CEO while transitioning to full retirement.
•Conversions allow for many different financing options during transition.
•Employee ownership protects jobs by keeping businesses open when ownership transition occurs. Selling to your employee ensures your legacy and community impacts continue on.