Four Paths to Consider Before Exiting A Business

Four succession paths for Hawaiʻi business owners planning retirement and how to protect your legacy.

Hawaiʻi is known for, and is rightly proud of, its entrepreneurial spirit.

But like so many other parts of the country, Hawaiʻi is facing economic headwinds that could cause significant change. These include rising insurance costs, affordable housing, a shortage of skilled labor as well as evolving trade policies nationwide. One key factor that comes up in our conversations with local businesses is the wave of business owners set to retire—and what that means for their companies.

The issue of retirement and succession is particularly pressing in Hawaiʻi, where the aging population is outpacing the national average. Between 2020 and 2024, the percentage of people in Hawaiʻi over 65 increased from 19.3% to 21.5%, faster than the national growth rate.

Succession planning is a crucial component of any long-term business strategy. It safeguards the future of a business, preserves its legacy, and ensures the community continues to access essential goods and services. Effective succession plans can mean the difference between a seamless transition and potential disruption for business owners, employees and clients.

Often business owners assume that succession is synonymous with a sale, but while a transaction is always an option, there are several paths to consider.

KEEPING IT IN THE FAMILY

Studies show that at least 2,000 family-owned businesses in Hawaiʻi employ five or more employees. For many owners, the ideal exit route is passing the business to the next generation. While this may seem like the smoothest option, it requires careful thought and preparation, often years in advance.

For instance, there are potential tax implications when gifting a business to family members, so consulting with an accountant early in the process is essential. Alternatively, selling the operation to family requires preparation similar to any major business transaction. Establishing a fair valuation and agreeing on payment terms is crucial, especially if the original owner plans to use those funds for retirement.

The most important aspect of a familial transition is having the right family members and team in place to take over. Some younger family members may be eager to carry on the legacy, while others may choose their own path. For families in the latter category, there are still more options to consider.

SHARING IT WITH THE EMPLOYEES

If no family members are available or willing to take on the enterprise, an ESOP, or employee stock ownership plan, may make sense. An ESOP transitions ownership to employees, who bring familiarity with the company’s culture, values, and operations. Employees receive stakes in the company, usually in the form of stock, making them beneficial owners. As the business grows, the value of their shares can increase, benefiting them financially.

An ESOP can comprise anywhere from 1% to 100% of company stock, and the structure leaves open a door for owners to remain active in the management by retaining a board seat, for example. This helps preserve the business’s legacy and identity, ensuring continuity in its mission and vision.

ESOPs provide a stable transition path, which can be particularly advantageous in uncertain economic climates. They also offer significant tax benefits for both the business and the selling owner. Contributions to the ESOP are tax-deductible, and sellers may defer capital gains taxes if they reinvest in qualifying securities. A fully ESOP-owned S Corp. is free from federal income taxes, making them a financially attractive option for certain businesses.

LOOKING TO A THIRD-PARTY

If the above pathways are not viable or aligned with your financial goals, a sale to a third-party remains an option. A sale – such as a merger or acquisition with another company, a private equity firm or another investor – can offer the owner an opportunity to maximize the value of a company. M&A can also offer flexibility when it comes to structuring a transaction to meet the specific needs and goals of the business owner. Whether the owner wishes to exit entirely or remain involved in some capacity, the terms of the sale can be tailored to accommodate these preferences.

TAPPING EXPERTS FOR GUIDANCE

Whether through a familial transition, an ESOP or an M&A transaction, succession is not a process any business owner should tackle alone. Understanding the full scope of options empowers business owners to navigate the complexities of leadership change while securing their company’s future.

Working with trusted advisers, such as a banker, attorney or an accountant, provides subject matter expertise, an objective point of view, and access to professional networks. These connections are crucial when implementing a succession plan.

By leveraging expert networks and developing a comprehensive plan, business transition can mark the start of an exciting new chapter. Understanding the full scope of options empowers business owners to navigate leadership change complexities while securing their company’s future in Hawaiʻi’s dynamic market.