Business transition planning guide

Owners of middle market companies eventually face a pivotal question. After you have dedicated years and often decades to building a successful business: What's next?

For many, the answer requires determining how to transition your company in a way that aligns with your values, protects your legacy and secures the futures of your employees and their families. While the idea of business transition planning can feel distant, one truth remains: it's not a question of if but when. Planning for a transition now is the key to ensuring a smooth and successful outcome.

Transitioning a company isn't just about spreadsheets and valuations—it's about defining what success looks like. Whether your goal is to maximize financial returns, preserve the culture you've built or pave the way for family leadership, understanding your priorities is essential. A well-thought-out plan allows you to explore more options and navigate complex trade-offs.

Owners who take a proactive approach to planning a transition have better outcomes. Early preparation opens the door to greater flexibility, closer alignment with personal and professional goals, and an enhanced ability to address critical factors like cash proceeds, taxes, legacy and the owner’s future role in the business.

What makes a company an ideal candidate for an employee ownership transition? It starts with more than just financial performance—it's about the foundation you've built and the values you've instilled.

Companies that thrive under employee ownership often share key traits:

Owner’s priorities

An employee transition isn’t about a quick exit—it’s about purpose and legacy. For many owners, financial gain isn’t the primary driver. Perhaps you’ve already achieved financial independence, or maybe you envision remaining involved in the business, guiding its future through a gradual transition. While financial considerations are certainly important, they often take a back seat to higher priorities: protecting your legacy and ensuring the wellbeing of the employees who helped build your success.

This type of business transition is ideal for owners who value long-term stability over an immediate payout. Unlike a strategic sale or private equity buyout, employee transitions are typically slower-paced, designed to preserve the company’s character and culture. Over time, owners can still achieve comparable financial outcomes—but the journey is more measured, reflecting a commitment to continuity and care for the people who drive the business forward.

Common types of business transitions to employees: ESOPs and management groups

When transitioning a company to its employees, a key decision is whether to transfer ownership broadly across your entire employee base or more narrowly to a select management group.

For those seeking to broaden the ownership base, the employee stock ownership plan (ESOP) is the most common path (see below), and employee ownership trusts (EOTs) are gaining in popularity as well. For a transition to a management group, some form of management buyout (MBO) is most likely. But it is important to remember that you can use all these options—more on this below—and that there are many variations in these sorts of transitions beyond those we describe below.

Several factors will feed into whether broad or narrow employee ownership makes the most sense for you and your company:

An ESOP can be costly to set up and may be less advantageous for a small company where there is little enterprise value to spread. There is no specific floor, but an ESOP would likely make the most sense for a company with at least 40 employees and about $15 million to $20 million or more in enterprise value. At that size, an ESOP can help to build a stronger culture and allow all employees to share in the company’s success. By the same token, a smaller company may be a better candidate for transitioning to a select management group, simply because it will be more affordable to the buyers.

With an ESOP, your company essentially funds the purchase of its own shares—creating a buyer for its stock—which can be a costly process. The transaction is typically financed from internal liquidity, loans taken on by the ESOP (which become a company liability), or the issuance of new shares, leading to potential dilution. A company may help finance an ownership transition to a smaller management group as well, but generally less equity is transferred at one time with a management buyout so the cash needs are not the same.

There are tax advantages to an ESOP. Normally, there is no deduction from income for these plans, and stock awards to employees accrue tax-deferred until sold in certain cases. However, these tax advantages are generally not sufficient to move the needle on their own. Similarly, if equity is transferred to key employees as compensation, the company may receive tax deductions, but generally not in the same magnitude as with an ESOP. Again, the business purposes and goals for a proper ownership transition should likely take priority over tax benefits.

As a qualified retirement plan, an ESOP can be complex to set up and annually administer from a legal, commercial and tax standpoint. A sale to management would usually be more straightforward from a legal perspective. This is not an overriding problem and can be easily solved by using expert advisors when setting up the ESOP.

You can also combine broad and narrow ownership strategies to create a tailored business transition plan. For instance, you might divide your equity evenly, implementing both an ESOP and a sale to management. In such a structure, the members of the management team would hold a proportionally larger share of equity than individual employees in the ESOP group. This hybrid approach can offer the best of both worlds: broadening ownership to enhance company culture while ensuring your senior management team gains a meaningful and affordable stake in the business.

For active business owners, the most common reason to transition a company within the family is to preserve their legacy. They wish to see their name continue, and there is a member of the next generation skilled and ready to carry on leading the company.

There are certain factors that make a family business transition more probable—and potentially more successful. These include:

For a business owner, there are several circumstances that could make selling your company to an unrelated third party the most attractive option.

You may have a successful and valuable business and want to see your legacy continue, but you do not have an obvious successor. Nobody in your family or your management team is willing or able to step in and take over. Under these circumstances, the best course of action is often to seek an external buyer.

Alternatively, you may have no wish to retire in the foreseeable future, but do not have the resources you need—either capital or expertise—to take the company to the next level. You may have to go outside to find what you are looking for in exchange for equity.

And, of course, there are different combinations of these factors, each of which can lead you in a different direction. 

A key decision from the start would be whether you are looking for a strategic buyer or an investor. A strategic buyer could be a competing company or customer in the same industry, for example. Typically, a strategic buyer would acquire the entire business and either integrate it with their own operations or run it at an arm’s length while imposing operational control.

By contrast, a third-party investor—such as a private equity firm or another institutional investor—typically will take a large equity stake and offer some flexibility regarding whether or not you remain in a management role.

Regardless of the appropriate buyer type, the more professionalized your business is and the more developed your employees and management team are, the more value you can expect when selling to a third party.

Which direction you go in depends very much on your priorities and needs. For example:

An alternative to an audit is a review of the company's financial statements. A company review is a formal analysis of your financial statements and accounting—it is less intensive than an audit but is a recognized form of accreditation if performed by a reputable firm.

This is early-stage planning, and you should do it before the investment bankers get involved. Ideally, at this point you would initiate a sell-side QoE analysis so you could review the financials thoroughly before the buyers come in and do their own diligence. QoE analysis helps you identify unaddressed financial and operational problems in your business that a buyer will eventually find and use to their advantage in price negotiations. You and your advisors should fix what can be fixed—such as outstanding tax liabilities—and develop reasonable interpretations for other issues that you can use in negotiations. This must be done early—if you try to do it midstream through a 30-day exclusivity period, there is little room for preparation, nuance or perspective.

Once you get into detailed negotiations and the investment bankers are involved, your QoE analysis will help them build detailed financial models and accurate forecasts of future cash flows, which is ultimately what your enterprise value is based on.

All successful business owners eventually face the problem of developing a good exit strategy. This could be thrust upon you suddenly if you receive an unsolicited offer for your company, or it could be the result of years of careful planning around a time-horizon of your choosing. Either way, it is a complicated process. The sooner you prepare for this inevitability, the more likely it is that your transition path will allow you to reach your personal and professional goals.

RSM has a long history of working with company owners to plan and execute successful business transitions. We can give you guidance and counsel as you sort through your goals, priorities and personal circumstances. We can also provide you with the technical competencies needed to bring efficiency and clarity to business transitions of all types and sizes—for example, asset and business valuation, estate and gift tax planning, wealth and tax counselling, audit and due diligence, sell-side advisory, earnings analysis, strategic finance, and family office services.