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Exit Planning
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Why Business Owners Need Help From an Exit Planner By Dave Gaw The missing link in most business plans is the bridge from leadership to letting go. People start and acquire businesses, and accumulate substantial investment portfolios, for many different reasons. None of them is about letting go. Consequently, most otherwise competent business owners are caught completely unprepared for the inevitable. The biggest mistake of a successful owner is the failure to plan a timely, profitable, and effective transition out of the business. Stories are legion about owners who refuse lucrative offers only to watch their red-hot industry turn ice cold. Or a tax burden so heavy that the next generation can’t afford to keep the business. Or the untimely death of a company founder leaving the employees without direction, the business without a future, and the family without hope. Any good business plan sets goals, objectives, and milestones. The same principle drives good Exit Planning. Best integrated into business and estate planning, it involves a broad range of skills. It must include such advisors as accountants, risk managers, and investment bankers, usually with an Exit Planning law firm taking the lead.
Value
Personal and financial objectives typically rise and fall on the value of the business. Incidentally, investment or real estate portfolios also benefit from Exit Planning. The starting point is present value. Then, compare it to the future value needed to accomplish exit objectives. Finally, incorporate into your business plan how to maintain value or increased it as needed. Value is determined objectively in one or more of three ways. Market comparison looks at the price paid recently for similar businesses under similar circumstances, and then adjusts for differences. Income analysis looks at income and expenses, accuracy of data, likely increases or decreases, the net income and prospects for a buyer replicating it. Depreciated cost looks at current asset value, and may add the value of intangibles such as reputation, market dominance, intellectual property rights, and special processes or people. Good exit planning identifies the most likely recipient of the business, and adjusts the market value through implementation of the Exit Plan. For example, transfer to family members would involve minimizing the value, thereby reducing the tax consequences. On the other hand, sale to a third party would involve maximizing the value. To achieve a higher value, one or more of the valuation components must improve. This may be accomplished through operational or longer range business planning adjustments. Or, it may be achieved through merger, acquisition, joint venture, public or private offering, or an outright sale. Professional advisors must be involved. Business and Tax
Growing a business or planning a graceful exit, business owners profit from the counsel of experienced attorneys to guide them through the legal and practical aspects of starting, buying or selling a business. Expect qualified counsel to take a deep and personal interest in the business, its owners, and their success. Whatever the transaction structure, controlling the tax impact starts well before the closing. It may take years to prepare this aspect of the Exit Plan. Succession by family members or employees must be treated differently than an outright sale. When done properly, planning reduces or eliminates income, capital gain, gift, and estate taxes. Cross-education and multi-disciplinary experience of advisors can benefit business owners. For example, at Gaw Van Male, three of our attorneys hold Master of Laws in Taxation; one is also a Certified Public Accountant (CPA); and three hold Masters in Business Administration (MBA). The broad perspective and long view are indispensable.
Wealth Preservation
When done well, estate planning helps families and individuals pass from one generation to the next their assets and investments, in a manner consistent with desires and personal values acquired over one’s lifetime. In fact, the Exit Plan should be adapted and included in both the business plan and the estate plan, regardless of complexity and sophistication. Gaw Van Male, among the leading Estate Planning firms in California, is expert at minimizing tax consequences, costs, and ambiguity among beneficiaries. Again, experience counts as three of our attorneys are Certified Specialists in Estate Planning, Trust Administration, and Probate Law, designated by the State Bar of California Board of Legal Specialization.
A Successful Exit Strategy Plan
Here is Gaw Van Male’s 10-Point Exit Planning Model. Business Plan: In addition to defining your business and its objectives, include how to maximize the value of your business, how to transfer your business in the future for maximum cash value, and how to prepare for the unexpected should you or a partner die or become disabled. Personal Financial Objectives: For as long as you expect to own it, define what you will need to live a satisfying life while growing and operating your business? Hint: This is about more than money. Exit Objectives: Define when you want to leave the business considering your age or the age of your family, the amount of income needed for financial security and the person or personality-type you want to succeed you. Valuation: This determines the distance between now and a satisfactory sale. Use professionals, examine the comparable companies, and ask how to improve value. Then, structure carefully to minimize taxes. Improve the Value of the Business: To reach your goal, you may need to increase value. Determine how. Use your trusted advisors. Examples of activities include increasing cash flow, improving efficiency, documenting sustainability of earnings, and hiring, motivating and keeping key employees. Transfer to Third Party: Consider this possibility and the profile of a prospective individual or corporate buyer. Involve professionals to evaluate a “controlled auction” and other techniques, to qualify prospects, to communicate persuasively, to assess terms, conditions and price, and to negotiate for you. Transfer to Co-owners, Family or Employees: The challenge is to ensure ongoing successful operations and reliable pay-out of the purchase price, while incurring the absolute lowest income and capital gain taxes for both the owner and the acquirer. Business Continuity upon Death or Incapacity: Determine one or more people who can immediately assume your functions during your extended absence, and how they will be compensated? If you die or become incapacitated, who should be consulted? What happens to your business? What happens to your family? If disabled, what happens to you? Wealth Management: You will need to determine how to preserve the wealth generated from the sale of your business. Use your financial adviser. You may decide to structure an installment sale or financing to provide a stream of revenue. Consult your attorney. Wealth Preservation Planning: For business owners, this is essentially an extension of the overall business plan that draws on specialized expertise and methods. It is an essential piece in planning for Business Continuity upon Death or Incapacity, and for the welfare of your family. Find an expert. Your heirs will thank you long after you’re gone.
For most owners, their business is their largest asset, a huge part of their identity, and the activity that absorbs most of their time. When you sell, the working asset turns to static cash, your identity morphs, and you’re left with a gaping hole in the calendar for the rest of your life. A successful Exit Plan will help prepare you well in advance for the biggest change and opportunity of your life. Contact an Exit Planner at Gaw Van Male. 707-252-9000 or ExitPlanning@gawvanmale.com |
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