Top Strategies for Cashing Out On a Business Before Retirement

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Aug 31, 2021
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Just as a steady flow of cash is key to a healthy company, sometimes events in life demand access to liquidity. 

For a business owner, a lot of wealth can be tied up in the company. Any diligent entrepreneur knows to segregate personal and business assets and expenses.

But at least part of the reason you established a business was to make money — and maybe now is the time you need access to some of that hard-earned cash.

So whether you want cash to invest and diversify your holdings, you need liquidity to pay for an unforeseen expense, or you have your eye on a special purchase as a reward for your hard work … you have several options for getting your money out of your business.

Pay Yourself: Salary, Owner’s Draw, Distributions, & Bonuses

If you’re a sole proprietor, you can take an owner’s draw from profits, essentially writing yourself a check. If you’re not a sole proprietor, your company structure dictates your options for how to take money out of your business. Partnerships may involve guaranteed payments and partner draws from profits.

Corporate structures typically allow for shareholders to be paid a salary, and in fact, IRS regulations stipulate that an S corporation owner who substantially works for the business is required to be paid a “reasonable” salary. Year-end profits can mean bonus payments and dividends, too. But salaries, bonuses, and distributions are unlikely to come close to the substantial value of your business enterprise.

Maybe you personally own the facilities that house your business, and your company pays you rent. Sure, there are these and other ways to maximize your annual proceeds. But what if you need or want more significant liquidity out of your business — and what if you’re not ready to retire or walk away from your company entirely?

You can take a loan from your business, but borrowing money presents its own risks in terms of tax liability. Should the IRS recharacterize the loan as a dividend or distribution, you’ll have to pay taxes on the loan amount. And again, there are limits to how much you can expect to borrow from your business, based on limits to cash flow.

Selling Your Business: Risks & Rewards

For most business owners, the company’s enterprise value plays an outsize role in their long-term financial plans, including retirement planning. But when cash needs are unexpected or come on suddenly, it can be easy to lose out on business value over the course of the sale transaction. 

Business valuation methods and market conditions can affect the sale price. Negotiations can be complicated. Finding a buyer can be tricky and time-consuming, and a business broker’s commission, tax liabilities, legal fees, and more can all chew away at your sale proceeds. 

In addition, selling to a third party or merging with a competitor can mean leadership overhauls that could also leave you without a job when it’s all over. That might be fine if retirement is your plan, but what if you intend to work for a few more years — or decades?

How to Access Your Cash & Control Your Exit

Selling all or a portion of your company to an ESOP enables you to get money out of an S corporation, cashing in on the value of your lifelong investment while exercising control over your exit from ownership. In fact, selling to an ESOP makes room for you to continue working as an employee for years, even decades, after the sale, earning an employee-ownership stake in the value of the company … because an ESOP is also a qualified retirement plan.

One key benefit of an ESOP sale is that it creates the liquidity event on a predictable timeline that starts when the seller makes the decision. Because the ESOP sale creates a buyer, there is no buyer search. For the same reason, it’s important to recognize that an ESOP doesn’t pay a strategic premium — so your sale price may be lower than it could be in a third-party sale.

But that doesn’t necessarily mean an ESOP sale will net you less cash. The tax advantages of an ESOP, along with sale structure and seller-financing options, make it important to consider after-tax proceeds when comparing your choices.

Your Business, Your Choice

The success of your company is a result of your investments, your time, and your hard work — so you get to choose the best way to access the cash tied up in the business. So what if you knew that a tax-efficient, cash-efficient choice could also have a long-lasting, positive impact on your employees and the community where you do business? 

Selling your company to an ESOP can give you the balance of healthy ROR and control over your exit while also delivering strategic advantages to the business, setting it up for ongoing success. Learn how, and discover the many benefits of selling your company to an ESOP when you read our eBook, Key Benefits of Incorporating an ESOP Into Your Business Strategy. Click the link below to download your copy today.

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Topics: ESOP Transactions, Business Exit Strategy, ESOP Planning

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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