What Happens to a Corporation After Its Owner Retires?

David Bolton

/

January 12, 2021

General Retirement
What Happens to a Corporation After Its Owner Retires? | Retire Fearless

When the owner of a company retires, how does the company deal with the transition into a new phase and cope with the changes of a new owner?

Upon the retirement of a corporation's CEO, the owner can either sell off the company in the market or to employees, name a family member as the new CEO, or shut down the business.

Everybody retires at some point, and this is no different for business owners. Business owner’s retirement can be more complicated because they have been the soul of the business over the years. However, what will happen to a business after the owner retires depends on the succession strategy that has been put in place prior to retirement. There are many ways to go about this.

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The Challenges of Baby Boomer Retirement

Today, the CEO of about half of the private organizations in the USA are baby boomers. This implies that most of these businesses will undergo changes in ownership in the nearest future.

There will tend to be a difficulty in succession planning by retirees because a lot of business will be changing hands, and there will be limited options to choose from those that can be at the helm of affairs.

What are the Possible Eventualities for an Organization When Its Owner Retires?

Taking case studies from companies whose CEO has retired in the past and what became of them, here are what can happen to a corporation when its owner retires:

Shutting the Business Down

Although this is a very difficult decision for the business owner to make, it is a possibility and has happened to various businesses over the years.

Factors that can lead to owners shutting down their business upon retirement are a mutable market, no proposition to buy the business, and poor maintenance from those they leave in charge.

The last factor is one of the most occurring situations because even after retirement, business owners still get to deal with offsetting bills such as taxation and wages.

If they realize that the business record is seeing a dip, or they are becoming indebted, they may just take the drastic decision of shutting it down before the situation deteriorates.

Handing the Business to a Family Member

This is quite common for most seniors that are facing retirement. They prefer to keep the company in their family’s name by passing it from generation to generation.

Realistically, this is usually the first option that most seniors who are business owners look to before retiring. Some make sure that they groom their children in line with the business.

Not all children or family members will be interested in taking up their senior’s business. For others, the children may not have the needed knowledge, expertise, discipline, and experience to become a CEO. This is why a lot of seniors stall their retirement for when their children will be ready.

As a senior, before passing your business to a family member, ensure you gain enough knowledge about tax and estate implications.

Selling Off the Company to Employees

Transferring the ownership of a company to employees is one of the most popular succession plans in the USA.The most common strategy for this is the use of ESOP meaning Employee Stock Ownership Plan. With this plan, the retiring owner will allocate certain percentages of shares to employees.

Employees will receive these shares as retirement benefits, so when it is time for them to retire, they will in turn sell back these shares to the company via the ESOP trust. Selling shares to employees is one of the best retirement plans for CEOs because it will not affect the company’s operation, and they can keep things running smoothly as if nothing happened.

What Will Owners Benefit from Selling Off the Company to Employees

The retiring owner has a lot of gain from selling to employees. Apart from the fact that the company will gain from this move in the future when the employees retire, there are other financial incentives like tax benefits due to dividends deduction from ESOP.

Also, ESOP is one of the best ways to get a buyer for the company at a decent market value which is the challenge that most retiring business owners face that make them close up shop.

There will be no need to put up the company for sale or speak to prospective acquisitors. All the owner has to do is sell the company to the ESOP.

Will Employees Benefit from Selling Off the Company to ESOP?

Selling off the company to an ESOP is the best move for employees in a business that is facing CEO retirement. The employees get to invest in the company’s present and future by buying off shares.

Also, the employees’ financial benefits will be void of taxation until it is time to retire or leave the company. Employees that work for ESOP bought companies usually have additional benefits such as retirement savings with high rates.

Other Advantages of Selling off Companies to ESOP

The best option for retiring owners that are concerned about the reputation and prolonged existence of the company is selling it off to ESOP. The company will still carry the name of the retired owner, so basically, selling off to employees is just to ensure that the company retains its mode of operation and business principles.

ESOP purchase can also be structured in such a way that interest made will be transferred over time. This will encourage a seamless transition.

What are the Important Steps to Ensure Before Retiring as a Company’s CEO?

Before business owners retire, they must put into consideration the state of their company after retirement. Leaving the business in the right hands and most viable state should be their mission, and the steps to ensure this, include the following:

Planning Ahead

Company owners should start planning years before they eventually retire. This planning should be focused on major aspects of the business that could hinder transitioning into a new administration if there will be one.

Choosing a Successor

The next thing is planning for the business succession, and how to go about the process. As a retiring business owner, you must first identify who will be the successor and gradually integrate them properly into the business model and responsibilities before you call it quits. This will make it easy for them to continue where you stopped.

Planning the Business to Work for you

This is a very important consideration if you are looking to make money from your business even after retirement. If you think that your business will not do well after you retire, then this is the right time to right that wrong and put things in place to make sure that the company does not feel your absence after retirement.

Strategize your Exit

Before you retire, seat with your financial and legal team and workout the best exit strategy that will favor both you and the business. Weigh the various options you have and allow the team to help you make a knowledgeable decision instead of an emotional one.

Do Not Retire Immediately

If you have more time in your hand, you can stay on for a while but in a more reduced role. This will help transitioning into a new CEO easier, especially if you are selling the company off to a new owner. You can negotiate a better buyout contract with the new owner if you follow this strategy.

Build a Solid System and Process

This is one of the most important factors that foster leadership change for a company. If the right process and system are in place the company will be successful under any form of leadership.

Share Responsibilities

Delegate responsibilities of every facet of the business to the various departments in the company. This will make everyone know what is expected of them during the leadership transition, and retain the working culture of the company.

Implant your Principles in the Company

New owners may want to instill new principles into the company, but you can draw up an agreement that makes sure that the company does not deviate from the values you set. The best way for retired owners to do this is by keeping some of the shares in the company. This allows them to have a say in the company’s decision making process.

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