Business is booming in Iowa. Over 33,000 new businesses registered with the Iowa Secretary of State in 2022, and the number has only grown since. While day-to-day operations take up most of a business owner’s time, what would happen if a business owner were suddenly unable to run their business or wanted to pursue other endeavors? Succession planning is a critical process that involves preparing for the transfer of leadership and ownership of a company.
Below we highlight the importance of aligning personal financial goals with business strategy and exploring different succession options, while weighing the pros and cons. Here are three “exit doors” in business succession:
Sell to a strategic buyer: By taking this path, you may get more than fair market value or a “strategic premium,” which benefits you financially. However, the acquiring company may be buying you out to reduce competition, potentially leaving no option for you, your management team or employees to continue with the company. This is a good route for those who want to exit quickly, for maximum valuation and liquidity.
Keep it in the family: Selling or giving your company to family members is a popular option for many business owners, especially if one or more family members have been working for the company. In Iowa, 36.8% of businesses are family-owned, making family succession a popular continuity plan in our state. If maintaining your business’s legacy as family-owned and operated is important to you, this choice may be the best fit. After an independent valuation review, you could take advantage of the lifetime federal gift tax exemption — which is currently valued at $12.92 million, arrange to receive a lump sum, finance the sale directly or draw a salary.
Sell business shares to an ESOP: Otherwise known as an employee stock ownership plan, an ESOP transfers ownership to an established trust to benefit employees. Employees can cash out those shares when they leave the company or retire. This route has unique benefits, including a tax advantage wherein you can defer capital gains taxes on the sale of the business. This strategy also allows you to reward employees, which could help reduce turnover, boost productivity and attract top talent. This is a highly regulated exchange, so make sure you plan carefully and tap the right legal, accounting and financial experts to shepherd you through the process.
Succession planning takes dedicated effort and is a critical step in ensuring the future you want for yourself and your business. As you start the planning process, consider these options and what is best for you and your company.
Chris Lambert is senior vice president, Commercial Banking, and senior relationship manager, for Bank of America. He can be reached at chris.lambert@bofa.com.
Heidi Parkhurst is the president of Bank of America Iowa. She can be reached at
heidi_parkhurst@ml.com.
