If you’re a business owner, you already know that you need to develop a succession plan. Educating yourself on your options well in advance of your departure will help ensure that you are positioning yourself to exit at the price and manner you want. Failure to do so can lead to frustration, disappointment and feeling as if you’re settling for less than optimal results.

Your exit strategy does not necessarily have to include a sale. You may consider leaving the business to a successor, or liquidating the business entirely. However, if you don’t have an obvious successor in place or you hope to see your business continue to prosper following your departure, it makes sense to consider other alternatives. As part of that path, you can either sell to an outsider, such as a competitor or investment group, or to your employees through an Employee Stock Ownership Plan (ESOP).

Selling to a third party can be time-consuming, and the market may not provide the multiples the selling shareholder expects. Or, there may not be any interested buyers ready to make an offer when the business owner is eager to sell. Strategic buyers will generally offer the highest multiple for a company, as they foresee significant savings in the future through consolidation. Financial buyers tend to offer fair market value for a company. If a transaction with either of these buyers is successfully closed, the profits can be taxed heavily, effectively lowering the return for you as the selling shareholder.

Selling to an ESOP would transition ownership into an employee trust. ESOPs carry tremendous tax benefits, allowing an owner to maximize after-tax proceeds. Depending on the circumstances, the owner may be able to defer capital gains tax by rolling over the sale proceeds into Qualified Replacement Property (“QRP”) three months before the sale to the ESOP takes place, or within the twelve months following the sale. ESOPs are highly technical, and they certainly do not fit every situation.

It is strongly recommended to engage an experienced advisor to analyze all options, allowing the business owner to confidently make an informed decision for the future of their company.