Planning Your Exit Part 2: Transferring Ownership or Selling Internally

“Exit planning is defined as “the conscious effort to grow a business in a manner that efficiently converts ownership to personal financial freedom and peace of mind.””
— a comprehensive book which defines the exit process and the needs of a business owner.

Ideally at business startup and practically, any time thereafter, answers to the following basic questions relating to exit are to be defined: 

1) How much income do you desire in the future?  

2) When do you want to leave your business?

3) How and to whom do you wish to leave your business?

Once these questions are answered and simply defined as the owner’s objective, the gap between desired personal income and the sum of income available at the time of exit though investments outside the selling price of the business and investments is to be calculated.  Valuation or selling price of the business at the time of exit can be estimated using industry guidelines and input gathered from industry professionals.

After completion of estimates and projections, the most desirable of the following strategies can be selected:

  1. Transfer Ownership to Family Member: (Transfer)

  2. Sell to Key Employee or Employees: (Inside Sale)

  3. Sell to Outside Buyer or Buyers: (Outside Sale)

  4. Close Down Business per Plan: (Liquidate Assets)

This article will concentrate on the Transfer of Ownership to Family Member and Sell to Key Employee or Employees.

 

Transfer to family

Keeping the business in the family is the priority of this strategy. Doing so is similar to a succession plan since the needs of continuing the business are given a high priority.  With this strategy, risks and sacrifices are often made with the heart versus the wallet.  Being fair to all family members can be a concern.  Key considerations include:

  • Selling, gifting or a combination to Family members are the only ways to transfer ownership

  • Financial performance using this strategy is generally weakened compared to other strategies

  • A defined Employment Contract or a Consulting Services Agreement for the exiting owner is a must

  • Control of business decisions is best separated from ownership by issuing voting and non-voting stock

  • A Family Business Council that meets regularly and is chaired by the exiting owner builds trust  

 

Sell to key employee

This can be the easiest strategy to implement. Gradual transfer of both control and ownership can be metered. This strategy is most reassuring to customers and support firms when announcement of sale is made. Business ownership through this strategy can become very attractive to a Buyer or Buyers with limited cash.

  • A Buyer(s) makes a large one-time purchase of a portion of the outstanding stock or interest

  • The corporation or other entity purchases the remaining ownership over an extended period

  • As purchase is made, the Buyer’s percent ownership increases and ultimately control is achieved

  • Owner compensation and critical check points can be formalized in legal agreements

  • Adequate life and disability insurance policies for the Buyer are essential to reduce risk 

 

Finis

Upon request, detailed information will be made available in a session or sessions with TBC Team Members.

This is the second part of a series of articles on Exit Planning. Future blogs in this series will focus on Business Valuation and External Sale of Business.

Have any questions or want to learn more? Call us at (510) 797-8375 or send us an email to request more information.

CONTRIBUTOR

Bob Morris
Certified Management Consultant, One Page Planner, Succession Planning, Teacher

Business AdvisoryTotal Business Care, LLCExit Planning, Management, Business