How To Get Out Of Business

This page contains brief summaries of some of the most common Exit Strategies.  This an area of Advanced Legal Planning that should be thought through with the utmost care and consideration with the benefit of appropriate financial and legal counsel. 

Walk Away
I once went to a garage sale filled with antiques.  The lady had an antique shop and decided it was time to retire so she was selling off the remaining assets at her garage sale.

This is not really a planning strategy at all.  However, this is the default plan that most business owners end up using.  When they want out or are forced to stop doing business their only option is to liquidate the assets and lock the door.  At the very best they get market value of the assets when they close.

This is what you are stuck with if you fail to plan appropriately.

Bleed it Dry
For businesses with good cash flow, one very simple planning technique that is very similar to walking away is to bleed the company dry and then walk away.

You do not put your company “in the red.”  You simply do not hold any more funds in the company than absolutely necessary.

This is sometimes called a “Lifestyle Company.”  Instead of growing the company and reinvesting in its future, you take out everything you can for as long as you can until you are ready to employ the Walk Away technique at your retirement.

Pass on To Next Generation
Often a business owner thinks of a business as a legacy.  The business owner hopes that it will provide for his family for generations to come.

The sad truth is that 70% of family businesses fail to successfully transfer to the next generation.  Of the remaining 30%, almost all fail at the third generation.

If you want to pass the business on, you must honestly seek out the desire of your children or others you wish to pass your business interest to.  If they don’t want to run it then you should look at other options.  If they are incapable of running it, you should look at options that allow for them to have ownership but not control or options that give them help running the business.

You must also make sure that those you wish to take over the business you have built up have the appropriate training.

If you plan to gift or sell interests to the next generation, it is important to have an appropriate valuation of your business for tax purposes.

If your intention is to sell the company to the next generation, read the topic titled Sell to a third party below.

Sell to partners
If a business is owned by more than one person and can continue on after an individual’s death, selling to the other members is often an effective method to reclaim the value of your business interests.

The most common structure for a sale to partners is a “Buy-Sell” agreement (Sometimes a Cross-Purchase agreement.)  In a Buy-Sell, the parties agree to purchase the interests of partners leaving and to sell to the other partners if you are the one leaving.

There are many things to carefully consider when doing this type of planning.

Funding

Cash – Will the company put away a large amount of cash just waiting for the first person to die?  (Cash sitting and waiting to be used is mostly unproductive so this is not usually the option of choice.

Insurance – Buy-Sell agreements are often funded with insurance.  When a person dies, the insurance proceeds will be used to purchase that partner’s business interests from the estate.  There are many different ways to structure this.  It is important to include your legal and financial professional team when making these choices

Valuation

How do you decide on a value?  The spouse of the deceased partner will think the value of the business interests are very high while the remaining partners may feel that it the value of the business interests are very low.

There are about six ways this problem can be solved.  It is important to discuss this with your legal counsel prior to creating a Buy-Sell Agreement.

Triggering Events – What events will trigger a Buy-Sell Agreement?  The standard options are Death, Disability, Termination of Employment (for corporate structures), Bankruptcy or Insolvency, Forced Sale, or Bona Fide Offers.  What your agreement should look like should be decided through careful counsel and agreement among the parties.

Some other considerations are:

• Terms of Payment
• Release from Indebtedness
• Any required Subchapter “S” provisions
• Restrictions on corporate actions
• All the “back of the contract” language

Sell to Employees
ESOPs (Employee Stock Ownership Plans) are used for many things.  One of their primary uses is to create a buyer for the business interests of the retiring owner.

This is accomplished by creating a trust within the company that the company can contribute pretax dollars to.  The trust has accounts set up for each of the employees as beneficiaries of the trust.

When a triggering event occurs (owner retires or dies), the ESOP trust purchases the owner’s shares.

The employees will own the shares based on a formula but must fully vest within 3 – 6 years.

There are limitations to the ESOP

Generally only available to C-Corporations & S-Corporations.  If you have an S-Corporation, your tax benefits will be limited.

The ESOP must offer to purchase the shares of any vested employee who leaves employment.

Though ESOPs do offer many tax advantages, once begun, they are hard to get out of.  They must be set up very carefully to allow for future events.  If the ESOP does not fit your own personal goals, we need to get your business ready to sell to a third party.

Another consideration when developing an ESOP to retire is that you must make sure you have employees properly trained so that when you are gone, the company can continue to run well.

Sell to Third Party or Get Acquired
Sales to third parties can take many forms and require years of preparation to maximize the value of your company and assure business continuity.

If you are selling to your children the list of considerations will be entirely different than if you sell to the owner of a competing business or a completely unknown investor.

One thing that will be the same for all of sales is that those acquiring your company will want to know that it will last.

Try this exercise.  Write down every activity that is performed in your company from answering phones, to making sales, to cutting checks and draw a box around each of them.  Now that you have a bunch of boxes, write the name or names of each person who performs those activities within your company.  Your business is not really ready to sell until you can remove your name from each and every box and still have the company run.  You have your work cut out for you.

Another thing that helps when trying to sell your business is to help potential purchasers of the business feel comfortable that key employees will remain.  Consider setting up bonus structures for key employees that will double their salaries over 18 months – 3 years if they remain with the company.  These programs can even be funded with life or disability insurance to plan for catastrophic events that force a sale.

Business Succession is a very complex field that we have just barely touched upon here.  Think of a succession plan for your business the same way you think about an estate plan for your family.  Neither are very fun to create but both bring you essential peace of mind once crafted and maintained.