Steven R. Covey, in his famous book The Seven Habits of Highly Effective People, identifies Habit #2 as:
Begin with the end in mind.
The amount of money you ultimately earn from your business depends as much on your exit strategy as on your original business plan and operational success. This is why it is so important to have an exit plan in place as soon as possible, and why you should have it designed and implemented by an attorney who focuses on this complex area of business law.
At the Law Office of Mark C. Metzger, we can:
- Advise you on the structure of the transaction
- Negotiate the best possible terms
- Draft the deal memorandum
- Advise you on legal strategies to address issues that arise during the due diligence process
- Draft, review and negotiate the numerous documents required in a business transaction. These can include asset purchase agreements, stock purchase agreements, security agreements, and more
Some of the more common exit strategies include:
Merger/Acquisition
This is one of the most common forms of exit. You negotiate the price, avoiding public valuation of your business within your particular industry. The person or company making the decision to acquire your business quite often has no personal stake in the selling price, so with proper counsel, you can negotiate a price that may far exceed the value of you business.
A potential problem with the merger/acquisition strategy is that the two companies do not see eye to eye on long-term goals, how the new business should be operated, and more. You, your management team and your employees could wind up with little or no control over your business and serve, essentially, as lackeys to the acquiring entity. The key is choosing a company that shares your interests and goals.
Sale to a third party
While 20 percent of businesses try to sell to a third party, only one in four of them succeeds in doing so. When the business exceeds $10 million per year, however, 50 percent of such sales succeed. To determine whether this is the ideal approach for exiting your business, you should consult an experienced business exit planning attorney.
One of the primary advantages to selling your business to a third party is that, with proper preparation in advance, you can simply “cash out.” That is, you can obtain the majority of the value of your business at the close of the sale, thereby achieving your financial objectives and avoiding potential problems and risks. In addition, if the market for the services and/or products your business offers is “hot,” you may be able to get more money for your business than it is worth during normal economic cycles.
A buy-sell agreement
A buy-sell agreement allows you to prearrange the sale of your business and keep control of it until the “triggering event” takes place. Triggering events can include your retirement, disability, divorce, disability or death. Following the trigger event, the buyer must purchase your interest at fair market value. It is important to note that you cannot sell or give your business to anyone except the buyer named in the agreement without the buyer’s consent. This fact has important implications with regard to your ability to reduce the size of your estate through gifting of your business interest.
Grantor retained annuity trusts (GRAT) or grantor retained unitrusts (GRUT)
GRAT/GRUTs are irrevocable trusts. In both cases, you transfer appreciating business assets while retaining an income payment for a set period of time. When the payment period ends, or you pass away, the assets in the trust pass to the other trust beneficiaries. The value of the retained income is deducted from the property’s value transferred to the trust. This means that if you live beyond the income period specified in the trust, when the business is transferred to the next generation, it may be reduced in value, thereby reducing estate and/or gift taxes.
Private annuities
With a private annuity, you sell your business and the buyer agrees to make payments to you for the rest of your life, or the rest of your life and that of a second person. Since a private annuity is a sale, not a gift, it allows you to remove assets from your estate without being subject to gift or estate taxes.
Self-canceling installment notes
A self-canceling installment note (SCIN) you transfer your business to a buyer and receive a promissory note in return. The buyer makes a series of payments to you under promissory note. When you pass away, the remaining payments will be canceled. SCINs allow you to enjoy a lifetime income stream and avoid gift estate taxes. SCINs provide you with a security interest in the transferred business, unlike private annuities.
Family limited partnerships
Family limited partnerships can help with the transfer of your business interest to members of your family. You establish a partnership with both general and limited partnership interests, then transfer the business to this partnership. In this way, you keep the general partnership interest for yourself, which lets you remain in control of day-to-day business operations. As time goes on, you gift the limited partnership interest to members of your family. If the value of the gifts is eligible for valuation discounts, you may be able to transfer much of your business to heirs with a significant reduction in transfer taxes.
Transfer business to family members
Many business owners, particularly owners of small businesses, want to transfer their business to family members. You should know that only 30 percent of family businesses survive to the next generation, and even fewer to the third generation. Why? The most common explanation is the lack of a plan for succession. We can design and implement a sound succession plan, and use a number of legal tools to ensure you pay the least amount in taxes and receive the greatest possible return on your initial investment. In addition, we can show you how to avoid the family infighting and other pitfalls that frequently accompany such transfers.
We invite you to contact us for an initial consultation to discuss your business and how to exit it profitably and smoothly.