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A Transition Plan is Key for a Firm’s Survival
Baltimore Business Journal, March 2003
Small business owners willing to plan an exit strategy can help themselves by finding prospective buyers among their employees or neighbors as many as ten years before they intend to retire.
Small business owners in metropolitan, inner city areas, have often walked away from their businesses when they could no longer run them, and they had difficulty finding a buyer with a lump sum in hand.
Yet the same owner has established a presence in the neighborhood.
Working now - ten years before the projected retirement date – to help a successor qualify for Small Business Administration or federally-funded Enterprise Zone loans to fund a ten year buyout can be accomplished.
It guarantees the continuing existence of a business important to the neighborhood. The ten year exit plan also enhances the wealth of the original business owner. Here’s how:
Let’s say the owner is in the highest tax bracket because of earnings from his company, and he has income from a separate business. He is generating $250,000 of income (salary plus profit) from this inner city business.
The business is worth about seven times free cash flow to the owner or about $1.75 million.
If the owner sells the business while he is still there, he can replace his salary with installment sale income (taxed at capital gains rates). This reduces the amount of taxes paid currently. He can also potentially get some cash up front (again taxed at capital gains rates).
If the owner does not implement a transition plan, he risks not being able to sell this business or income stream to someone in the future. The most likely buyer is an existing employee or an employee group.
With this scenario, the business owner serves as mentor to the “Owner-Candidate” and after the tenth payment, at the end of ten years, turn over the keys and walks away. The owner has enhanced his personal wealth through a profitable sale.
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