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Making Your Exit Strategy Work
Chuck had been an entrepreneur for his entire life. About 20 years ago he started his current business from scratch. Due to his insatiable appetite for nonstop improvement, his business blossomed. Now he's thinking about retirement.
Chuck felt a great deal of loyalty to his employees, and wanted to develop a plan to sell the business to his General Manager, Carlos. Since Carlos was a young guy with a family, he didn't have many financial assets. Chuck needed to develop a plan that would make the buyout process affordable for Carlos, while simultaneously assuring that his heir, his daughter, would get a fair value if anything happened to him.
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PROMOTIONAL CONSULTANT MAGAZINE
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TOP SHELF TIP NO. 45
"Don't simply retire from something; have something to retire to."
Harry Emerson Fosdick, American clergyman, 1878-1969 | |
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What he did was develop an exit strategy a few years before his retirement date, and executed it.
This week, Promotional Consultant Today is looking at important steps one needs to take to develop a quality exit strategy. Yesterday we discussed three steps: Creating A Financial Plan, Maximizing Retirement Savings, and Determining A Company's Worth. Today we'll look at Steps Four and Five.
Step 4: Establish a transfer strategy for the business to the buyer. Because Carlos didn't have much money or assets, he wasn't going to be able to simply go to the bank and get a loan to pay for the business. To solve this challenge, annual performance incentives were created for the company. If the business met those performance incentives, Carlos, as general manager, would be gifted five percent of the stock of the company at the end of each year until he reached 49 percent ownership in year 10.
At that point, Carlos would be a 49 percent owner with a 10-year track record, and a bank would likely be willing to loan him half of the business' value to complete the buyout of Chuck's interest.
Step 5: Get it in writing. Now Chuck needed to sit down with an attorney and get all this in writing.
Since his advisors had done most of the legwork already, they were able to specifically tell the attorney what was needed, which saved a considerable sum in legal fees. The attorney drafted a stock purchase agreement for Chuck and Carlos. The agreement laid out the performance incentives, where the stock would be held, stipulated that the shares would be non?voting, and required Carlos to buy Chuck out at the end of the 10-year period.
The attorney also created a trust, which laid out the transfer of Chuck's assets to his daughter, in case he died.
This type of buyout strategy is useful when the owner wants to sell to an employee or family member. Time is the key element that allows these plans to succeed. The greater the amount of time the business owner plans for the exit of his business, the greater his chance of success.
Everyone knows a business owner who's had health problems, or unexpectedly passed away, causing the business and all its value to go down the tubes. This could have been avoided in almost every case by taking the time to create an exit plan.
Another key element in making your exit strategy succeed is to work with advisors who have extensive experience with this type of planning. Many quality CPAs and attorneys don't fall into this category, yet they're smart enough to bring in an outside advisor who does.
Also, it's important that the advisors work as a team, so that everyone is on the same page, working toward the business owner's goals.
Chuck's plan was enacted five years ago, and all has gone exactly as planned. Chuck's still the life of the party, and loves seeing his vision turned into reality.
Source: Thomas E. Houck, CPA, CFP, is a speaker, author and consultant who's program, "Your CFO Advantage" has helped numerous business owners grow their businesses, reduce their taxes and lower their stress level. He is the author of The Top 10 Mistakes Business Owners Make (and how to fix them).
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Copyright 2005-2007 Promotional Consultant Today. All Rights Reserved. |
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