Exit Planning--Structured Financial Partners: Building value for your company's tomorrow ℠

The Four Phases: Phase Four—Turning Over the Keys

The final phase is what all the fuss and hard work was about. For most smaller middle market companies there are three potential markets to buy your company:

• Third party buyer
• Insider—co-owner, key employee (or group ) or family member,
• ESOP—a special retirement plan that creates a market for employer stock

We will focus here on insider and third party sales. When we work with our clients, we make it clear that we are unbiased as to which type of sale they wish to make, since we are process oriented rather than transaction oriented…

Sales to third parties can be rewarding…They generally yield more cash more quickly than insider sales. But markets are fickle as this current economic climate has reminded us. Our investment banker friends have told us that the number of transactions will be way down this year, but companies in certain hot niches are still selling at attractive multiples.

In down markets, the only businesses to sell for top dollar will be those in hot niches and those that are incredibly well run with value drivers that make them stand out in a crowd.

Insider sales can meet a number of needs for a business owner. First, the inside buyers are likely to be less demanding than outsiders are far as due diligence. Since the owner doesn't have to find a buyer, he won't have to pay an investment banker…Perhaps the owner has always wanted to pass the baton—whether to a family member, younger co-owner or a key employee.

These insiders, however, tend to have one thing in common. They don't have the cash to buy the business, nor do they typically have the collateral to satisfy the bank. This leads to the departing owner being the bank, by carrying paper to fund the buyout. In these situations, installment payout arrangements need to be cleverly designed so that they are tax-wise for all parties so the departing owner is not pulled out of retirement to repossess a failing business.

Sometimes the right action is a contrary action.

I was at a meeting this morning and was reminded of Warren Buffett's quote that he simply attempts to be fearful when others are greedy and to be greedy only when others are fearful. This is a great reminder that sometimes the right action is a contrary action.

As we talk with our business owner clients about their exit planning—they ask us how can they possibly think or extricating themselves from their businesses in times like these?

Our answer, of course, is you don't have to exit now, but you have to plan NOW and start implementing NOW, because times won't always be like this.

As baby boomers continue to age, there will be a glut of business owners in that demographic seeking to cash out of their businesses. There are not enough buyers in the younger generations to absorb the glut, so only the businesses that are best prepared and look best in the eyes of prospective buyers will get top dollar. Others will be a disappointment to their owners when they attempt to sell.

Our last few posts addressed some of the things a business owner can do now to take position him or herself for the upturn when it comes.

Other things a business owner should be considering are:

• Review estate planning objectives relative to the business transfer. With the picture becoming more clear on the estate tax there are opportunities here whether or not the business will remain in the family
• Consider gifting some closely-held stock using a "squeeze play" such as a GRAT. With low interest rates and depressed valuations of companies, when the upturn hits, a business owner can achieve different goals:
  • Transfer very inexpensively from an estate and gift tax perspective, stock to a family member of a business that is going to remain in the family.
  • Transfer to the trust for later distribution, shares of company stock for the benefit of adult children or grandchildren of a company that will eventually be sold, again on a highly tax leveraged basis.

I have never been in a conversation with another professional advisor about a client who planned too much, yet I've heard war stories about those, if they had only done this…