Business succession options can take many forms and always require careful consideration. The business owner may contemplate the transfer of ownership to family members, employees or management as well selling the business to outside parties. Each option has its own set of benefits, risks and financial considerations. Although transfers to family members may appear to be the most desirable option and provide the highest chance of success, this is not necessarily the case. In actuality, it is estimated that inter-family business transfers carry a low success rate of approximately 35% compared to a success rate of 80% for management and employee sales. Management buyout agreements may well be one of the most desirable business succession options available for some of the reasons outlined below.
In many cases, management buyouts have significant operational and financial advantages over other succession options. One desirable feature is that the problem of finding a suitable buyer is automatically solved with a management buyout. Another challenge with the sale of a business, continuity of management, is also met with a management buyout because the management team participating in the buyout most often consists of employees that are already filling key management roles within the business. For these reasons, among others, a management buyout may be the business succession option that provides the most operational consistency and has the greatest chance of success.
Tax considerations point to yet another possible advantage of a management buyout. Income taxation of the sale of a business can take a variety of forms. Generally, when either the stock or the assets of a company are sold, income taxes are paid on the full sale price. However, if the sale is structured as an “installment sale” or uses owner financing that is amortized over time, the seller pays taxes over the period of time in which the payments are received. These arrangements are generally more tax efficient than paying taxes on the full sale price all at once since they report the income over a period of time, thus resulting in lower average tax rates over the time payments are collected. A seller may be more comfortable with either of these financing options in the case of a management buyout because they already have an established relationship with the buyers and can more easily assess their chances of success. Since the sale of a business is generally taxed at a rate of 30% or more including some combination of ordinary income tax rates, long term capital gains rates and individual state tax rates, a succession option that favors lowering the tax rate may offer a distinct advantage.
If you are interested in developing or implementing a succession plan for your business, the experienced professionals at CGT Solutions have the knowledge and experience you are looking for. Our accounting and legal experts have helped many successful businesses transition to new ownership and stand ready to help your business do the same. Contact us today to schedule a free, no obligation consultation!
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