What happens to a corporation when its CEO/owner retires?
The U.S. is in the middle of a retirement wave, with the last of the approximately 70 million baby boomers turning 65 in 2030. Among the trillions of dollars in assets they hold are more than 12 million privately owned businesses.
Choosing when and how to retire can be complicated. Factors like income streams and asset liquidity, personal goals, health conditions, relationships, and mental/emotional readiness all have their place in the decision.
And the retirement choices made by the owner of a private, closely held company affect far more people than just the retiree and their family. Employees and their families, customers and vendors, and whole communities can be affected by the owner’s choice.
Assuming you don’t intend to liquidate, you still have several options:
- Retire and maintain ownership
- Transfer ownership in a family succession
- Accept a management buyout
- Find an external third-party buyer
- Sell to an employee stock ownership plan (ESOP)
In this article, we’ll examine a few of the most important considerations for business owners looking ahead toward imminent retirement.
Key Questions Every Retiring Business Owner Must Ask
A C corp’s existence is perpetual, independent, and a separate legal entity from its majority shareholder owner, so keeping ownership at retirement is certainly an option.
But is it the best strategy? And if it’s not, what is?
Separating from your corporation is a transition process, not an event. So as you explore your choices, consider how satisfied you’d be with the consequences of each.
1. How would I feel if the company ceased to exist?
The first aspect of this question is obvious: Are you financially and mentally prepared to resign? You may have the financial confidence to retire, but many entrepreneurs derive their identity and purpose from their role as a business owner and leader. A successful retirement plan accounts for money, health, and relationships—so have a strategy that accounts for those 10+ hours you’ve been working every day for decades.
But it’s also about your most important relationships: employees and their families, vendors and customers your business works with, the greater community and local economy your company supports. Retirement choices that align with your personal values are more likely to support a satisfying next chapter.
2. Am I prepared to shoulder the risks of continued ownership?
Retiring from management means stepping away from day-to-day operations, yet majority ownership usually signifies you’re deeply invested in the organization’s success. Are you prepared to navigate a new approach to ownership?
You’ll likely continue serving on the board of directors but relinquishing day-to-day operational command limits your control over what’s likely a major source of retirement income. What’s your backup plan for income?
Social Security benefits can also be impacted by business ownership and income for those who intend to retire before full retirement age. Convene a conversation with your business accountant and wealth manager to get their insights and recommendations.
3. Have I diversified my wealth and retirement income streams?
Diversification becomes more important as retirement approaches, so for most people it’s wise to choose a strategy that’s flexible enough to meet your liquidity needs while helping you structure a retirement income plan that works.
4. Who’s my leadership successor?
Have you already communicated a succession plan? Family concerns can complicate succession planning, especially if your top, trusted key employee isn’t a family member. Whoever your chosen successor, consider your responsibility to employees, shareholders, and yourself. Professional development, operational cross-training, and ongoing growth opportunities will help support success and business continuity.
5. What do I need—now and in the future?
As business owners turn 60 and older, they’re often bombarded with messages, often from private equity or business brokers, with offers to sell. That can start the gears moving, and it can be easy to forget your choices don’t have to be all-or-nothing.
Can you access the liquidity to diversify your wealth today—and still stay closely involved in leading the business into the future? Can you structure sale payments to meet your need for income over a longer term? What about tax advantages?
What about your vision for the business? If your answer to Question 1 is, “I’d be crushed,” a typical third-party sale could be a tough choice. If a buyer makes major changes in operations, culture, and even employees, the company (and your legacy) could soon be unrecognizable.
Taking a Closer Look at an ESOP Sale
Every path to a successful retirement requires research, due diligence, and professional advice — and that’s why it’s smart to consult with an ESOP expert along with your tax advisor, business accountant, and health manager as you explore whether your company is a good fit.
When you sell to an ESOP trust, the transaction is typically structured as a leveraged buyout. The ESOP trust borrows to purchase your stock. Its payments toward the debt are a deductible business expense.
Selling your closely-held company to an ESOP establishes an employee retirement plan that invests in company stock. Consider whether its advantages align with your values and priorities:
- Tax advantages: If the ESOP buys 100% of the business, the corporation can become a tax-exempt entity. This can result in significant, long-term tax savings that can help support business growth. There are also potential tax advantages for the selling owner.
- Succession planning: Selling to an ESOP gives you control over your exit, so you can take the time to establish and nurture the growth of a successful new leadership team. Take as long as you need to ensure continuity for customers and vendors. And, you also know that once you finally step away, the business is in the hands of the employees, whom you chose to pursue your vision.
- Employee motivation: When you establish an ESOP and give employees a company stake, they have a personal stake in delighting customers and working profitably. That’s good for the company and for you — especially if your transaction includes seller financing that’s part of your retirement income plan.
- Flexibility: You can sell all or a portion of your shares to the plan. The sale can be seller-financed, lender-financed, or a combination. You can sell some shares now and more later.
- Fair market value: An ESOP is required to pay fair value for your business. The certainty of creating your own buyer can make the sale process less stressful than a third-party sale can be. As potentially millions of businesses may be hitting the market over the next several years, it’s tough to predict what prices could do.
It’s worth noting that a third-party buyer might offer a synergistic premium for a sale price that’s over fair market value. But don’t assume that makes it your best option. Be sure to investigate how a structured sale and ESOP tax advantages could net you as much or more.
Next Steps for Retiring Business Owners
You don’t need to decide today, but at some point you’re likely to be ready for retirement from the organization you invested your career in building. If yours is a family business, the decision could be especially complex. That’s why you should start conversations with your trusted advisors early, identify your likely successors, and reflect on your top priorities.
Whether it’s maximizing your wealth outcome, safeguarding your professional legacy, or rewarding employee loyalty, an ESOP could be central to your retirement plan. Get more information and insights into what your company could look like after the ESOP sale. Just click below to download our free ebook.