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A Publication of WTVP

For successful entrepreneurs, the road into the business is often more clearly laid out than the route from involvement. However, a well-drawn roadmap for the endgame can be the difference between achieving success and missing the target on important life goals. As a result, preparing an effective exit plan can provide a valuable service.

Laying the Groundwork
Since a viable entrepreneurial exit strategy must take account of both where your client is today and where he or she would like to be in the future, exit planning should start with a comprehensive appraisal of business and personal finances. Many planners have found it valuable to start with a net-worth assessment with their clients. This not only helps to identify all available resources, but it also helps to match those resources against specific goals. The assessment process may also help you identify potential opportunities for client relationships unrelated to the exit plan.

Perhaps less objective, but no less key to a successful exit strategy, is values clarification. For example, if some or all of your client’s children are involved in the business, does your client want them to continue in their current roles, or expect that all will move on when the business is sold? Your client might have a clear choice for successor, and so might wish to consider how that choice will impact other family relationships. Keep in mind that many exit plans have foundered because of internecine conflicts. A related area of concern that will form a backdrop for the exit strategy is your client’s vision for life after the event. Is he or she planning to retire? To remain involved as a consultant or part-time executive? To start a new venture in another field? How each of these questions is addressed will direct the practical thrust of the nascent exit strategy.

Finally, a successful exit process should be based on a sound understanding of existing business relationships and provisions. Your client should identify the key professional and executive talent in his or her firm, and then formulate appropriate reward and retention strategies for them.

Potential Deal Forms to Consider
The various choices of deal structure each offer unique cost/benefit tradeoffs. Here is an overview of the options:

Managing the Proceeds
A key part of any exit strategy is the financial plan for managing the proceeds of the deal in a manner consistent with the client’s post-sale goals. Such plans typically include a blueprint for investing sale proceeds in a diversified portfolio. They also typically include an estate plan crafted to take advantage of the trust structures and tax code features that allows you to preserve wealth and protect the future interests of heirs. Among the favored devices may be family limited partnerships and grantor retained annuity trusts, which can reduce the estate value of shares passed on to heirs. In addition, many entrepreneurs are interested in charitable remainder trusts. These may be used to fund philanthropic programs that realize specific charitable goals while maximizing tax benefits and minimizing costs.

Points to Remember

  1. The sale of a business is only one small transaction at the center of a larger plan often referred to as an exit strategy.
  2. The most successful exit strategies are those that give the business owners the greatest probability of comfort with the results as seen in their financial security, family dynamics, and long-range goals.
  3. There are many options for structuring the sale of the business, and each has different implications for other elements of the broader strategy. Buy-sell agreements can help maintain continuity for remaining partners in a wide range of circumstances. Pure cash transactions typically yield the greatest immediate liquidity. Leveraged transactions may enable managers, partners or family to take over and maintain continuity for the business. ESOPs can provide tax benefits and empower employees.
  4. Trusts can be valuable tools for managing the income tax and estate planning implications of the wealth derived from a business sale. iBi
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