Business Transactions

• Management agreements
• Employment agreements
• Operating agreements
• Ownership participation/incentives and sales terms
• Non-competes
• Compensation tools- stock appreciation (SARs), phantom stock plans (PS)
• Business transfers - buy-sell agreements, stock bonus, stay bonus
• Franchises

Business Succession Planning

It is inevitable that every business owner will eventually leave their business. Business succession planning is about taking control over the process of exiting your business and not leaving it to lawyers for various family members or key employees or a government statute to decide. An attorney with the right kind of experience can make sure the end result of your hard work is protected.

Questions to Ask Yourself

Do you know your retirement goals and the cash required to meet them?

Do you know what your business value is now-in cash?

Do you know the best way to increase the income stream from your ownership interest?

Do you know how to structure a sale to a 3rd party to be most tax-efficient?

Do you know how to transfer your business to family members, co-owners, or employees while lowering taxes and potentially enjoying financial gain?

Do you have a continuity plan for your business if the unexpected happens to you?

Do you have a plan to help secure finances for your family if the unexpected happens to you?

According to one study [Small Business Review, Summer 2001], only 30% of all family-owned businesses survive to the next generation; only 12% make it to the third generation; and a meager 3% are functioning into the 4th generation or beyond.

Why? Most business owners simply do not plan an exit. They do not do proper estate planning, which often results in unnecessary estate taxes that drain the life out of their business. And they do not plan for a successful transition to new owners.

Who could take over your business? Your options may be greater than you think.

Family members. They are a logical choice. Most business owners wish to pass their business to one or more family members. You may have one or more relatives already working in the business with you.

Depending on your financial needs, you can gift and/or sell your business to family members, with the proper agreements and finances in place. Some techniques will provide you with retirement income and let you transfer the business at a discount, saving estate and gift taxes. Most let you keep some control.

Be sure to consider family members who will not be involved with the business. Life insurance is often used to "equalize" inheritance to members of the family not involved in the business. You must, however be objective in considering which family members might be potential successors.

Business Partners. You can have reciprocal buy-sell arrangements with each other, or use an "entity- purchase" arrangement. There are advantages and disadvantages to each depending on your situation. Either puts in place an agreement for when one partner dies or retires, the remaining partner(s) automatically buy the interest.

Employees. If the appropriate factors are present, company size number of employees, an Employee Stock Ownership Plan can allow employee ownership and provide some control to the current owner until retirement or death.

Charity. Charitable Trusts can provide lifetime income, avoidance of capital gains on the sale, an income tax deduction, and reduce your taxable estate.

Sale. An outright sale to a third-party is always an option, but depending on company size is not a likely an option for smaller companies, and the tax planning options are not as great.

A good exit plan for a business owner should also provide for the possibility of illness or disability, as well as other catastrophic events. A team approach often proves to be the best approach-involve quality advisors in risk analysis, risk management, insurance, investments, retirement plan design, valuation, accounting, tax, and law. Working with this type experienced team of professionals, will help you address these issues and provide a successful exit plan.

Options for Business Succession

When you are preparing to exit from your business, multiple options for succession exist in addition to transferring ownership within your family.

Management buy-outs can take many forms. The most common of these are buy-sell agreements or other stock transfer techniques. The process involves determining a price, terms, and one or more of the following techniques:

Selling to the employees can involve options from a partial sale to an ESOP to a sale of all the stock.

Selling to an outsider can involve a new owner changing or closing your business. In this process we will help you hire a business broker or Certified Public Accountant to help "clean up" company financials and prepare for a buyer's package. Negotiations end in the signing of a letter of intent that outlines the terms of the sale and the price.

Liquidation is not really an alternative to succession planning because a business ceases operation. Liquidation of assets may be the best way for you to get the highest price. Assets are put on the market and sold. The proceeds are used to pay off liabilities.

In any circumstance, consideration should be given to the valuation of the company, and "efficient" transfer of the ownership interest, to the next generation or key employees. Due to various tax implications, certain types of sale can place undue burden on the cash flow of the business, and reduce the amount received by the seller. Taking into account, and planning for the tax efficient transfer of ownership interest can reduce the amount the owner must receive and reduce the burden on the company to meet the obligation.

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