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Opinion: Starting a business? Plan your exit now

Industry Insight

Posted online

The day you open for business is not a minute too soon to think about your long-term exit strategy – a written plan including provisions for increasing the value of your business at least five to 10 years ahead of your exit date.

Incidentally, this can provide a template for running a better business at any time, so it’s to your benefit to deploy these preparations right now.

Start with creating a culture of success with your employees, especially your key people. Help them develop an ownership mentality, so they see their critical role in the company’s long-term success and their role in helping that continue with or without you.

Exit planning overlaps with contingency/disaster planning for your business: Whether you retire at age 65 on your terms, or meet with an untimely demise tomorrow, you’re leaving the business. And that requires planning. 

If your spouse would inherit the business at your death but would have no interest in actually running it, what would happen? If a buyer would have to be found, who would manage operations in the meantime? Establish buy-sell provisions now:
 
• Identify who will take over: partner(s), family, employee(s) or a third-party purchaser? If it’s family or staff, initiate in-depth discussions about how this would actually work, all the way through a successful transition for the business, employees and customers. This is necessary for both exit and contingency planning.

• For death-of-owner planning, prepare a written buy-sell agreement with an experienced attorney. This includes a purchase price formula – which should be revisited regularly as conditions change – the responsibilities of each party and other provisions. Determine how the buy-sell agreement will be funded. Life insurance is a common method: The business owner is the insured, and the successor-owner is beneficiary. While there are many variations to this, the constant is that it provides immediate cash for the successor-owner to purchase the business from a surviving spouse.

Again, if you intend for an employee or family member to take the reins at your retirement or death, what training and/or experience do they need to get ready? Get started now. 

Consider “stay-put” agreements to commit key managers and employees to assist with transition to new ownership, perhaps with a “stay bonus” in addition to regular pay as an incentive to stick around.

All of the “death-of-owner” planning items also apply to exit plans from the sale of the business. But for a sale you’ll need a purchase agreement and other documents, and the funding will come from a commercial lender, seller note and/or installment payment agreement instead of life insurance.

Here are five other contingency planning items:

1. Disability, illness or injury of the owner. In addition to disability/income replacement insurance for yourself, consider business overhead expense insurance – so the bills get paid and the doors stay open while you’re out of commission.

2. Death or disability of a key employee. What would be the expense of replacing your top manager or salesperson temporarily or permanently? How much revenue would potentially be lost during the transition? Consider key-person life insurance and/or key-person disability insurance.

3. Resignation of a key employee. An executive bonus plan can “golden handcuff” them. A common method is to contribute to a cash-value life insurance policy on behalf of the employee. The life insurance component provides family protection for the employee, and the cash value can supplement their retirement savings someday. This shows the employee how much they mean to you in a concrete way. And vesting provisions in an accompanying written agreement put teeth in the program; if they leave before the vesting period is complete, they sacrifice some or all of the benefits.

4. Commercial property and casualty insurance. This may include business continuation provisions to cover expenses and payroll during downtime following a catastrophe. 

5. Estate planning. For both your family and business, review your estate plan with your attorney and accountant and revisit regularly, to ensure that you’ve properly addressed your estate tax and gift tax exposure, as well as probate avoidance provisions, your will, trust and powers of attorney, and other estate planning documents. Discuss with your planning professionals the potential capital gains tax benefits of stepped-up basis for heirs, versus transfer of company ownership during your lifetime via gifts, installment sale or other means.

You may need a number of risk-management specialists to help address potential hazards to your livelihood and sweat equity, and to plan now for a smooth, successful business sale.

Happy planning, and here’s to your graceful and lucrative exit in the future.

Certified financial planner Kenny Gott is executive vice president at Piatchek & Associates Inc. and author of “Bottom Line Financial Planning.” He can be reached at kgott@pfinancial.com.

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