Alternative Exits for Business Owners

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The money held in the ESOP trust is managed exclusively by the company's board of directors, not employees, allowing the principals to maintain control of these funds until the owner is ready to retire.

An ESOP can buy any number of shares, from a minority position to a controlling interest. If the ESOP acquires more than 30 percent of the outstanding shares of a company, a seller can avoid capital gains on those shares indefinitely, giving this method of sale a huge leg up. Like an external buyer, an ESOP trust can also seek a bank loan, using the business's assets as collateral, to cover a portion of the purchase price.

An ESOP doesn't make sense in all cases. Only corporations—C or S corps—are eligible to form an ESOP. The business must be profitable, generating at least $100,000 in pretax income, and must have at least 15 employees. An owner selling shares to an ESOP must use a fair market value that can be supported by an appraisal.

A plan and trust will cost approximately $50,000 to set up and roughly $10,000 to $15,000 each year to maintain in legal, accounting, and appraisal fees. Ideally, ESOP experts advise that you set up a plan 10 years before you seek liquidity. In reality, business owners rarely plan that far in advance. A transaction can be structured in a matter of months.

With an ESOP sale, you will be ceding control to your workers. A transition plan is critical to make sure they are prepared to carry on once you leave the business. ESOP advisors such as the Menke Group specialize in these vehicles and can be a good source of information if you choose to explore this path.

3. Don't sell just yet.

When all else fails, your best option may be not to sell at all. Think about how you can rework your business to run without you and still let you collect a portion of its annual profits. If you can forgo a large up-front payout, you may make more money this way than by selling for a mere two-times to three-times earnings.

In order to step back from the day-to-day activity, you will need to promote existing employees or hire management to run the business without you. Finding such talent isn't easy, but a business that doesn't rely on its founders to survive is in a better position to sell. Bringing in management will also require you to be involved for a longer transition, but no more than would be entailed by a sale in which the seller's purchase price is tied up in back-end payments.

The profit your business generates after paying for additional employees may start to feel just like the staggered payments you would receive from a highly negotiated third-party sale. You might find that you net more over time this way. And if the economy improves in three to four years, you will be in great shape to sell for a premium, having already properly structured your exit.

Monica Mehta is managing principal of New York-based investment firm Seventh Capital.

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