Business exit plan: Paul Simon had the right idea

T. Ray Phillips graduated in 1991 from De Pauw University with a Bachelors of Arts Degree and a major in Economics. He spent 4 1/2 years in the field of health insurance sales after graduation and consistently finished among the top 25 producers nationwide for Reserve National Insurance, Co.

Mr. Phillips shifted his practice to investment and insurance portfolio analysis and design associated with the Indianapolis Financial Group in 1996. In December 1998, the company that is now The Family Business Legacy Co, LLC was created to work primarily with the privately held and family-owned business. In 2002, T. Ray earned his Chartered Financial Consultant (ChFC) designation, and in 2004 became the first person in Indiana and one of less than 500 individuals nationwide to earn the Certified Family Business Specialist (CFBS) designation. Concurrent with the CFBS, he also earned his Graduate Certificate in Business Succession Planning. All of these designations are from the American College in Bryn Mawr, PA. In 2007, he earned the Accredited Estate Planner designation (AEP) and is currently finishing his Board Certification in Estate Planning (BCE) designation.

(317) 208-6312 ~ trphillips@finsvcs.com

According to Paul Simon, there are 50 ways to leave a lover. Not being as creative as Mr. Simon, we’ve only come up with eight ways for owners to leave their companies.

• Transfer the company to a family member;
• Sell the business to one or more key employees;
• Sell to key employees using an Employee Stock Ownership Plan (ESOP);
• Sell the business to one or more co-owners;
• Sell to an outside third party;
• Engage in an Initial Public Offering;
• Retain ownership but become a passive owner; and
• Liquidate.

Given the right circumstances, one of these paths may be the appropriate for you. The process of determining exactly which path is best may present an obstacle that many owners may choose to avoid. If, however, you wish to "leave your business in style," you should work through a three-step process of selecting your path. During this process you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your company as well as with the external realities of the marketplace. Establishing thoughtful objectives is the first step of your Exit Plan. Doing so well in advance of your departure gives you and your advisors the time necessary to help make your goal a reality. In essence, you need to “Take Inventory” of where you are and where you want to go.

Choosing a Path - Step One. First, you, as an owner and with the help of your advisors, identify your most important Exit objectives. These objectives are both financial - "How much money will I need from the transfer of the business to assure my and my family’s financial security?"- and non-financial -"I want the company to stay in the family," or "I want to remain involved." Internal and external considerations impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to throw his company's and his employees' fates on an unknown third party, may decide that an ESOP or carefully-designed sale to his key employee group is the best exit route. External considerations that may impact the choice of exit path are: business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of the anemic state of the M&A market.

Step Two. As you develop consistent objectives and motives, you then must value your company and determine its marketability. This analysis usually provides further direction and can eliminate potential exit paths. Once again, a detailed “inventory” of your business that creates it’s value is critical. For example, if the value of a company is high and its marketability is low (perhaps because of the depressed state of the M&A market), an owner may decide that a sale of the business to an outside party is impractical. Instead, selling to an "insider" (co-owner, family member or employee) may be a better option.

Step Three. The final step in choosing a path is to evaluate the tax consequences of various exit paths. This evaluation will include factors such as form of business entity as well as any changes that must be made. Again, if a sale to a third party would likely mean a sale of assets and the company is a "C" corporation, the adverse tax consequences indicate a sale via an ESOP might be an appropriate choice. Using this three-step process, owners can help narrow the list of exit routes. If more than one route remains, owners and their advisors must conduct open and frank discussions based on realistic possibilities to determine which path to take and when. Make sure your Team of Advisors knows the pros and cons of each exit path.

As you’ve noticed, I’ve referenced “inventory” throughout the article. That parallel reference is intentional as it relates to what Hartman Inventory should be doing for your business and home. Continuity planning is key in times of surprise events. Entrepreneurs have very little time to spare. Without an updated inventory of what you or your business owns, when an insurance claim hits (storms, floods, fires, theft, etc), a lack of a valid inventory can cost you thousands of dollars of your money in addition to lost time trying to “prove” what you owned to insurance adjusters. Keep time on your side!

DISCLAIMER: The information contained in this article is general in nature and is not legal advice. For information regarding your particular situation, contact an attorney or tax advisor. This newsletter is believed to provide accurate and authoritative information related to the subject matter. The accuracy of the information is not guaranteed and is provided with the understanding that none of the providers of this newsletter, including Business Enterprise Institute, Inc., is rendering legal, accounting or tax advice. In specific cases, clients should consult their legal, accounting or tax advisors.

The example provided is hypothetical and for illustrative purposes only. It includes fictitious names and does not represent any particular person or entity.
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