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Why Exit Planning?

Are you like many business owners?

  • A majority of closely held and family owned businesses will change hands within the next five years1; but
  • Many Business Owners may not have taken active steps to transition out of ownership.
Setting Exit Objectives - Step One

"When a man does not know which harbor he is heading for, no wind is the
right wind." So said Seneca almost 2,000 years ago. Today, speaking to
business owners he might likely say, "Exit Planning for business owners must
start with knowing your exit goals and objectives; otherwise, failure may be
inevitable."
What Is My Business Worth? Step Two

For many owners, the answer to one question determines their eagerness and
ability to leave their companies: "How much is my business worth?" This
question is indeed critical and answering it is the second step of your sevenstep
Exit Plan.
Working On — Not In — Your Business - Step Three A number of years ago, I met with Diana Duff, the owner of Major Machining, Inc. (MMI), a machine shop. She wanted out. I suspected that her severe case of "early onset burnout" was due to the departure of her three-person management team six months earlier. These employees had not just left the company, they had set up a competing machine shop funded by the many MMI customers they took with them.
Getting Top Dollar For Your Business Step Four

What is a good way for you to get top dollar for your business?

First, consider selling to an outside third party, not to an insider such as a child,
key employee or co-owner. Outside third parties typically have the cash and
the ability to pay a higher earnings multiple for your business.
Transferring the Business to Children or Employees: A Recipe for Disaster? - Step Five

How do you successfully transfer your business to a child, key employee or coowner?
The most successful method is to follow a recipe that mixes, in equal
measure, three key ingredients:

  • One part: the ability, experience and dedication of the prospective new
    owners;
  • One part: a company with strong, consistent cash flow and little debt;
    and
  • One part: a transaction designed to prevent income taxes from eroding
    the cash flow available to you, the seller.
Planning for a Rainy Day - Step Six

There may be nothing worse for a business than to have its owner suddenly
die

. . .especially if it's your business.

Let's look at what can happen when an owner dies.
Preserve Wealth: Give it Away! Step Seven The last step in your Exit Plan is Wealth Preservation Planning. But that doesn't mean you should wait until you are out of the business to begin actively preserving your wealth. In fact, if you wait until the value of your business is converted to cash, it may be too late to realize all of the benefits of wealth preservation. The most significant and powerful claimant to your wealth is the IRS — especially in the estate tax arena.
Why Business Owners Fail To Plan

Franklin Taft was understandably a bit neurotic. He was increasingly anxious to
begin planning for his eventual departure from his business but his concerns
prevented him from proceeding. "I'm too busy working in my business to think
about how to leave it. Besides, I don't know what to do-and neither do my
advisors."
Transfers to Insiders

When transferring your company to insiders, a Low Value can put Dollars in
your pocket.

Owners of successful businesses valued between $5 and $10 million face two
difficult exit problems1:

  1. Cash buyers are usually seeking larger companies; and
  2. Owners are generally unwilling to assume a long-term installment note
    because of the risk of non-payment.
ESOPs: Exit Opportunity for Business Owners

Aesop is famous for his stories that teach important lessons but are fictionaland
often fantastic. Our topic today, ESOPs (Employee Stock Ownership
Plans) is similar. Fictional and often fantastic claims are made about what
ESOPs can and cannot do. ESOPs can help business owners to achieve a
number of important Exit Planning goals-namely, selling a business tax-free to
employees for full market value. But as with a fable, readers must take care to
separate the important lesson from the fiction. What can or should you believe
about ESOPs? Read on.
Sole Owner Continuity Plan

Making Sure the Business Continues When You Don't
Greg King barely survived helping his oldest son learn to drive and now it was
time to teach his younger son. Before putting himself through on-the-road
training one last time, Greg called his life insurance representative. "I have no
co-owners to buy my company if I don't come home. What can I do?"
Former Business Owners Express No Regrets About Selling Out "I can't play golf every day." "My wife wants to see more of me — but not at every breakfast, lunch, and dinner!" "What do other ex-owners do after they've sold out?" Failing to answer these concerns can create vacillation, reluctance, and ultimately, an unwillingness on the part of many owners to proceed with planning for their business exits.
Protecting Assets

To engage in Exit Planning, you must have a business to exit. Exit Planning
assumes that the better the business, the easier and more successful the exit.
Exit Planning also assumes that good businesses are not only profitable and
well managed, but that they are protected from liability risks. Failing to protect
your business value from legal liabilities is a fundamental Exit Planning failure.
Transfer Your Business And Avoid The Deal Killer: Taxes

When you started your business, you may have had issues on your mind other
than choosing the best corporate entity form for an eventual sale. Now that you
are thinking about your exit, however, entity choice (C or S corporation) has
become critically important. That's because selling your company's assets
inside the wrong entity can cost an extra 40 percent in taxes of your sale price:
an unacceptable prospect for most owners.
Finding The Right Advisor

Your job as a business owner
"My investment advisor suggested that I sell my company to an ESOP. Is that
a good idea?"

My estate planning attorney recommended that I begin giving my business to
my children. What do you think?"

"I'm getting tired of running my business every day. My accountant thinks a
sale to a third party is a good idea. What's your opinion?"
Bonus Incentive Plans for Key Employees

What's the point?
"I want to install a bonus plan for my key employees to reward them for their
performance."

"One of my best employees left last week for a company for more money. I
think I'd better install a good bonus plan to stay competitive in the
marketplace."
Characteristics of Successful Employee Bonus Plans

Too often, owners discover that the compensation plans they've put in place
for key employees are sadly inadequate only when those key employees leave
their companies for greener pastures. The departure of one or more of these
key employees can not only complicate your daily business life, but it can slam
shut the door on your exit plans. Without experienced management in place, it
may be unlikely that you will be able to leave your business in style. In fact,
you may not be able to leave it at all. Key employees are aptly named not only
Vesting: Handcuffing Key Employees To Your Company

In the previous issue of The Exit Planning Review™, we outlined the four
characteristics of a successful Employee Incentive Plan. Namely, such plans
should:

  • Be specific, not arbitrary, and be in writing;
  • Be tied to performance standards;
  • Make substantial bonuses; and
  • Handcuff the key employee to the business.
Getting Started In The Exit Planning Process

Nora Chapman's story was typical of most business owners. At age 54, she
was ready to leave her 25-employee advertising business. She was thinking of
selling to one or two of her key employees and when we met her, her first
question to us was: "Is this the right exit choice?"

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NAELA

Henry C Weatherby and Jeffrey S. Rivard are members of NAELA, the National Association of Elder Law Attorneys

Weatherby-Associates.com designed by Patrick Teglia

34 Jerome Ave, Suite 310 - Bloomfield, CT 06002 - Phone: 860-769-6938