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Succession Planning: 5 Questions to Ask

Updated: Dec 20, 2022

Over the years, we've noticed a correlation between how much time a business owner spends reflecting on personal and financial goals and how satisfied they are with the outcomes when selling their business. For some, the goal is simple: maximize the financial outcome.


For many others, there is so much more to what success looks and feels like.

Plotting out a clear vision for life after the sale of a business is a vital aspect to properly planning for the sale of the business itself. As we head into the new year, we're sharing 5 questions that business owners can use to reflect on and evaluate their succession planning goals:


5 Questions to Reflect On:

  • How will I realize the economic value that I’ve built?

  • What sort of work / life balance change am I seeking?

  • How important is the legacy that I’ve endeavored to build?

  • How important is protecting my employees in the event of a sale?

  • Do I have family members that I would like to retain in the business?


Whether objectives include funding a much-anticipated retirement, continuing in the company that you've built but with less chips on the table, or passing on your business to the next generation- one thing is for certain: when you start with the big picture in mind, you can drive toward the right succession plan with clarity and confidence.

The flexibility of the ESOP as a succession plan often provides a comprehensive strategy which can advance the interests of everyone involved in the organization including owners, management, employees, and customers.


And while the ESOP structure may not be the right solution for every owner or company, it is a universal buyer for almost any successful business. Therefore, it is always worth taking the time to understand if this structure might be the best option for meeting the objectives of the owner, management and company.

At the bottom of this article, we've included a chart to help you compare the various options for succession planning, including the sale of a company to an Employee Stock Ownership Plan (ESOP), a private equity buyer or a strategic sale to a competitor.

Lazear Capital has worked with hundreds of business owners to uncover and explore what matters most to them and then deliver plans crafted with creativity and deep expertise - designed to maximize both personal and professional goals.


Our firm is always available to illuminate how these insights might benefit you or your client. To learn more about succession planning with Employee Stock Ownership Plans, please contact us to schedule a discussion.



ESOP Succession Planning

Conventional Exit Strategy

Post-Close

The selling owners can stay involved until they want to step away and management can continue to build upon their vision.

Sellers are typically not involved after a short transition period.

Price

Similar to a “financial buyer,” ESOPs pay the full fair market value for the company, which is determined by way of a valuation process and reference to similar companies

Private equity investors or strategic buyers base the purchase price on their perception of the value of the company; the nature of the business; and their targets for returns on their investment.

Employee Involvement in Sale

Employees, through their ESOP retirement plan purchase the shares from the owner over time; without using any of their own money or taking any personal risk.

None.

Financing

ESOPs do not require equity capital in the transaction. Financing is supported by a bank (many of which have ESOP lending teams) and the seller.

Third-party buyers require equity and bank financing to purchase the company.

Tax on Sale

Section 1042 of the Internal Revenue Code created the opportunity for owners to receive proceeds from the sale of the business tax-free, eliminating the need to pay any Capital Gains taxes on the proceeds. This means owners in Ohio will receive approximately 33% more of the net after-tax proceeds.

The sale is taxed as a capital gain and any ordinary income taxes when paid. Some tax planning can help mitigate taxes, but not defer or eliminate them entirely.

Go-forward Income Tax

In an S-Corp ESOP, the company will not pay any federal or state income taxes (in most states) going forward.

The company will be taxed at the typical Federal and State rates.

Employee Benefits

ESOPs are a proven tool for attracting and retaining employees, which does not require employees to take any monetary or personal risk.

​Benefit options for employees are at the discretion of the buyer and are likely limited to traditional defined contribution plans, as well as achieving the targeted return on investment.

Legacy & Culture

​The legacy and culture of the company are kept intact for the next generation of management, employees, and customers.

No certainty of legacy or culture.


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