An Exit Strategy Enhances Your Business (and Legacy) Building

Exiting your business isn’t a decision to be made lightly. It may have been something you were considering before the COVID-19 pandemic hit, or it could have been something that you’ve had to reckon with because of shelter-in-place orders. Maybe your business had already been struggling, and you’ve had to come to terms with your financial struggles due to long-term closures and loss of revenue. Or perhaps you want to cash out of the investments you’ve made over the years, and reallocate your resources into something else before there are any other unexpected changes in the economy.

Whatever your reason, there is a lot to take into account when considering a business exit, not just when it comes to your money, but when it comes to your personal legacy as well.

Creating an intentional exit plan will help you achieve the best possible outcome for yourself and your family’s finances, your reputation as a businessperson, and the business itself. Having a plan in place, even if you aren’t planning to exit anytime soon, can also help keep the business stable in case of your sudden death or disability. This is especially important now, when COVID is posing such a major threat to health.

Sell to Partners, Employees or Family Members

If you are hoping that someone else will carry forward your company’s mission, you will likely want to sell to someone who understands your business already. If you have low turnover and devoted employees who know how to drive the ship, handing over the keys to one of them may not cause too much upheaval for the business itself.

The employee could pay you in one lump sum by taking out a personal loan, though this is a riskier and higher-cost option. A more manageable choice for many is an “installment sale,” which means financing the sale of business and having the employee pay you in installments over time. Making an employee or family member a part-owner of the business over time could make it easier for them to complete a buy out when the time comes.

Another option is to set up something called an Employee Stock Ownership Plan (ESOP), which means that every employee owns a share in the company. Anyone who leaves the company cashes out their shares when they go—that includes you.

Set Your Business Up to Be Acquired

To get the best return on the sale of your business, you will need to make it as attractive as possible to an outside company or individual who you think would be interested in buying it. This option may require a lot of work on your part, or else you may end up having to sell far below market value in order to make a quick exit. You will need to conduct market research, tighten your operations, and be able to prove your business’s profitability to any prospective buyer.

To implement any of the plans above, and to plan for an exit that maximizes your gains and preserves your legacy, you will want to consider hiring us to help you take the following steps.

Exit Plan Steps to Keep in Mind

• Evaluate Your Business Systems: Whether you choose to sell to an outsider or be bought out from within the company, you will want to have your business systems evaluated from the perspective of “saleability” so you can identify what needs to be shored up for the business to be able to continue beyond you.
  Amend Partnership Agreements If Necessary: If you have partners, hopefully, you discussed exit to begin with, and have plans in place for how to exit, transfer your interests, and split up profits and losses. If not, it’s time to get those agreements updated and documented now. Call us immediately, if it’s time to relook at your partnership agreements.
• Write Up Provisions for Family Succession: If a family member will be taking over your business, be very clear about what that entails. Who will inherit ownership of the business? Who will inherit the actual duties of running the business? If there are multiple family members, such as siblings, who all may have an interest in the company, but who may not all be treated equally, begin to address those issues now. We can help with that.
• Get a Business Valuation: Before you consider exit, look at the different valuation methods, and decide which one applies to your business. We can help you with this process.

Even if your business is surviving and maybe even thriving as a result of the changes brought on by the coronavirus pandemic, now is a good time to start thinking about the exit strategy for your business. If you’re not sure how to set yourself up for any of these strategies, just give us a call and we can help you get started.

This article is a service of Greg Gordillo, Family Business LawyerTM. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.