For many owners, the answer to one question determines whether they can leave their companies: “How much money will I get when I sell?”
This question is critical, and answering it is Step Two of The Seven Step Exit Planning Process™. Realistically, you can’t exit your business unless you achieve financial independence, and the primary source of that independence is likely to be the funds you receive for your business when you leave.
If the value of an Exit Plan isn’t already obvious, let’s look at a few hard, cold facts…
First, you are far from the only fish in the sea. As the wave of Baby Boomers (born between 1946 and 1964) reaching and passing retirement age crests, the departures of those who own businesses could result in a glut of companies for sale, driving down valuations and giving new leverage to buyers. Simply put,
Family-controlled corporations and partnerships are often utilized as part of a family wealth transfer plan as vehicles for managing and controlling family assets, especially in the context of succession planning for family businesses. Family-controlled entities are attractive, in part, because of the ability to make gifts or bequests of interests in the entity to family members at a reduced tax cost using valuation discounts. The value of the interests transferred to family members is often subject to valuation discounts because of various restrictions imposed on the recipient’s ability to participate in management,
Knowing who you are is essential to determining what you want when exiting your business.
Setting your objectives is the first step in planning your exit strategy, and you should build around the personal values and goals that you hold dearest. In determining what you want from life, you will shape what you want from your business.
Maybe you want to cash out by selling to the highest bidder, then retire without looking back.
“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? ”
Sales to key employees,
James Keefe sat nervously in his Exit Planning Advisor’s office. Until the day before, he had been president of Keefe Automotive Sales, one of the region’s largest new car dealerships. Now he was out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business.
Florida is an “Income Cap State” with regard to eligibility for Medicaid benefits to pay for nursing home care. That means that if the nursing home resident’s income exceeds the income cap”, he or she will not be able to qualify for Medicaid benefits to pay for their nursing home care, unless a “Qualified Income Trust” is implemented. [A “qualified income trust” is often referred to as a “QIT”, a “QIT Trust”, or a “Miller Trust”.]
In the previous blog, we made a strong case for creating a buy-sell agreement for co-owned businesses. To summarize, if owners agree in advance of any transfer event about how to appraise business value, and about the terms of payment, they can avoid the heated and often damaging negotiations that can occur when one owner leaves the company.
We continue making our case by outlining several other advantages of a (well-drafted and recently-reviewed) buy-sell agreement.
With over half of today’s 9.5 million owners of established businesses reaching the retirement age of 50 years old or older it is likely that many of you will be ready to leave your business within the next decade or so1. What have you done to plan for that day?
What are you waiting for? How could planning for the biggest financial event of your life not be worth your time and effort?
A successful business Exit Plan achieves three important owner goals:
- Financial Security. (The business sale or transfer provides the amount of income the owner, and owner’s family, needs after the owner’s exit.)
- The Right Person. The owner chooses his or her successor (children, key employees, co-owners or a third party).
- Income Tax Minimization maximizes the amount of cash in the departing owner’s pocket.