- Our Team
May 30, 2023
This is not the first or last time you will hear this: COVID-19 changed everything. But it has had a specific impact on business owners who are trying to figure out how their businesses will survive the disruptions of the past few years. There was so much uncertainty that it was difficult to see past the most immediate problems. Now that things are settling down, it is time to think about the issues that were put on the back burner. Business succession is one of the most critical of those issues. There are options:
Making the best decision is not straightforward, and the best answer may be different than it would have been prior to the pandemic. Business owners should conduct a careful analysis of the situation before moving forward. For example, company leaders should know the answers to questions like these:
Once this analysis is complete, it is time to make some decisions.
Sell the business
If selling the business is the best solution, consult a professional to do a business valuation. The valuation process will use either the income approach (review projected revenue and accounts for potential risks), the market approach (a comparison of the value of other similar businesses that have recently sold) or the assets approach (subtract the business’s total liabilities from its total assets). Keep in mind that the value of the business may be lower than it was before the pandemic because business valuations are based on historical data.
Once a buyer is located, there needs to be a sales agreement. Again, professional advice is necessary to be sure the agreement is adequate and comprehensive.
Choose a successor — transition the business
If ownership of the business is being transferred to another person or entity, the transaction can be structured as an outright sale, a gradual sale or a lease agreement. In addition, there are tax consequences of each of these options. The business type and whether the transition is to another family member may also impact how the sale is structured.
Keep in mind that there are other strategies that fall under this option, including employee stock ownership plans and employee buyouts.
File for bankruptcy
Business owners may choose to file for bankruptcy, or they may simply close their doors.
If bankruptcy is the option that is chosen, the business owners should consult a professional to be sure they understand the implications of their choices, including the type of bankruptcy and the types of debt that are and are not discharged. Every business is different and has its own unique factors that need to be evaluated.
Close the business
Closing a business comes with its own set of issues. If the business is owned by a sole proprietor, the process is relatively simple. However, if the business is organized as any type of partnership or corporation, the process must follow the process set out in the company’s articles of organization. In addition, to formally close, the business will need to take these actions:
Your decisions may have long-term implications, so be sure to get qualified legal and financial advice before proceeding.
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