Exit Planning for Family Businesses

5 Ways To Transfer Your Business Interest
Avoid The Chaos of FORCED Liquidation

Exit planning is necessary because a family business owner will transfer their business interest -

either during his/her lifetime...

or when they die or become incapacitated.

Every year many family businesses, without proper exit planning, have to be liquidated - and liquidation under these forced circumstances results in "fire-sale" prices.

There are still only five ways to transfer your business interest.

  1. Transfer Ownership To Your Children
  2. Sale To Other Owners Or Employees
  3. Sale To A Third Party
  4. Orderly Liquidation
  5. Take it public with an IPO

According to top family business expert Don Schwerzler, "The key is to pick the approach to exit planning that's best for you and assemble a team of advisors to help you carry out this plan."

Schwerzler has been studying and advising family business entreprenurs for more than 40 years and he is the founder of the Family Business Institute, headquartered in Atlanta GA.

Have a question about selling your family business?


John Brown's "How to Run Your Business So You Can Leave It In Style" documents a very effective 7 step process for exit planning.

However, a logical argument might not motivate you sufficiently to undertake exit planning... so let's face the monster head on and see just what is involved. It really isn't as complicated as some would make it appear. And John Brown has done a really great job, between his book and its related Workbook, of reducing the task to manageable steps. Here's an overview of his 7 Steps. And a few of John's highlight points.

Step 1: Setting Exit Objectives

  • Do you know exactly what your retirement goals are - and how much cash it will take to reach them?
  • You'll need a solid team of family business experts - typically including investment / insurance advisor, CPA, estate / business / tax attorneys, investment banker [middle market business] / business broker [smaller business], transaction attorney.

    Some of these people might already be serving your business if you operate an Advisory Board .

Step 2: Determining Value / Price

  • Do you know how much your business is worth today - in cash?
  • Your business is typically your most valuable asset. But only exit planning for a sale to outsiders will involve maximizing value. Transfer or sale to insiders will focus on income stream or cash flow but minimizing value.

    Yes, increasing income stream while minimizing value is not only possible, it is the objective for sales to insiders.

  • We discuss Business Valuation in our Succession Planning area of this site.

Step 3: Preserving, Protecting, Promoting Value

  • Do you know the best way to maximize the income stream generated by your ownership interest?
  • Preserving involves exit planning activities like: annual review of income tax status and corporate entity status [C vs. S Corp. in the United States]; business plan review and update; individual planning update; use of trusts; Employee Share Ownership Plan; annual update of value.
  • Protecting value from creditors includes: annual fiscal and legal audit; offshore trusts; risk management review for liability and casualty insurance coverages; remove personal guarantees and assets from use as business collateral;
  • Promoting value is key in exit planning and involves focusing on the value drivers
  • The key point here is for the owner to spend some time working on rather just than in the business. This point is not unique to exit planning, but is almost a universal good business practice.
  • Value Drivers are factors that affect the value of the business. As such, investors and lenders look for the business' performance in these areas.
    • Universal value drivers include: increasing cash flow; developing operating systems that improve sustainability of cash flows; improve facility appearance; pay down debt; document sustainability of earnings; implement a strategy to grow the company; build a strong management team and groom a successor;
    • Industry specific value drivers would include things like: stability of growth; inherent growth rate; return on working capital and receivables and inventory turnover; technical expertise; diverse and attractive customer base; corporate structure; employee performance ;

  • Motivating and keeping key employees is critical for exit planning to work
    • increases income stream and cash flow
    • they are potential buyers
    • increases value by providing capable management team for new buyer

  • 4 Elements common to successful bonus plans
    • Bonus plan is specific, not arbitrary, in writing
    • Bonus is tied to performance standards
    • Bonus is substantial
    • "Handcuffs" key employees to the business

  • We work with professionals who specialize in the design, implementation and on-going cutting edge administration of Executive Incentive Plans such as: Deferred compensation; Stock Option; ESOP; Phantom Stock; 401(k) "Excess".
  • Ownership / Equity based plans include: Stock bonus; stock option; stock purchase
  • Cash based plans include: cash bonus; non-qualified / deferred compensation [benefits formula; vesting; forfeiture; payment schedule; funding]; stock appreciation rights plan; phantom stock plan
  • Combinations of Cash, equity, non-qualified deferred compensation

Step 4: Converting Business Value to Cash - Sale to an Outside Party

  • Do you know how to sell your middle market business to a third party and pay the least possible taxes?
  • Planning and preparation are critical here. And getting the right help from an investment banker or business broker. Following an exit planning process pays big returns!

Step 5: Transferring the Business for a Promissory Note

  • Do you know how to transfer your business to insiders [family, employees, co-owners] while paying the least possible taxes and enjoying the maximum financial security?
  • Key concept here is to maximize income and therefore cash flow while minimizing ownership value.

Step 6: Contingency Planning

  • Do you have exit planning for your business if the unexpected happens to you?
  • 4 Major problems arise on the death or disability of a business owner. Exit planning must solve these problems.
    1. Continuity of business ownership

      Sole owner business needs to use a Stay Bonus Plan to secure continued services of employees; funded with sufficient life insurance to pay bonuses during the transition;

      Communicate your wishes in writing to spouse and advisors about key employees to assume responsibility; advisors and others who can be consulted during the transition period; to whom the business can be sold if that is your wish.

      Multi owner business should use an up-to-date and adequately funded buy-sell agreement to enable remaining owners to acquire deceased's interest. Must cover such events as: death; disability; right of first refusal on transfer to third party; termination of employment; retirement; involuntary transfer due to bankruptcy or divorce; business dispute amongst owners.

    2. Loss of financial resources can be relieved somewhat by: creating successor management; funding with life insurance to replace immediate losses and provide ongoing capitalization.
    3. Loss of key talent can only be mitigated by having in place employees who can assume responsibility; if they have to be found, provide enough funding with life insurance to find and train replacements.
    4. Loss of employees and customers might be mitigated if successors can maintain cash flow and confidence of employees and customers. You will need a Stay Bonus Plan that must be funded to pay the bonus and compensate those who stay; and a succession management plan naming the person[s] to take over. And decide now about whether sale, continuation or liquidation is best... employees and customers want and need to know this.

Step 7: Wealth Preservation

  • Have you taken steps to protect your family's wealth?
  • "NOW" is the time to do Exit planning - transfer of ownership might occur without notice!
  • Funding for anticipated needs - liquid assets; life insurance; sale of business
  • What to transfer to children who do not receive business interest. [Passing estate equally to children does not mean passing business interest to children who are not active in the business.]
  • Decide and communicate who is in charge of the estate and the business.
  • Exit planning must consider current income tax, estate and gifting regulations. These change periodically and the changes have deadlines attached to them.

Family Business Strategic Planning

HELPFUL TIP - Planning is key to developing a successful exit strategy - it takes time and money. We often advise family business entrepreneurs to consider assigning the responsibility for ORGANIZING their parents exit strategy to the Nexters


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Questions about your exit strategy? Contact Don Schwerzler to discuss your exit plan

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