A Well-Planned Exit Strategy

If you've spent much of your life building a successful business, you know the feeling all too well: it's difficult to even think of passing the reins to someone else. Yet it's a truism as sure as death and taxes: at some point you will leave your business – voluntarily or otherwise.

Having an effective exit strategy in place well in advance helps ensure that the transition is handled in a way that is beneficial to you and your family as well as to the business.
Planning for uncertainties creates stability and may result in your company being more attractive for purchase.

As BB&T works with clients on business transition plans, we always do so within the broader context of the client’s overall goals and personal financial strategy. 

Virtually all business owners want to maximize this “liquidity opportunity” to accomplish personal, financial, estate and charitable planning goals. But in many cases, there are considerations that go far beyond a generic model-based solution. We take into consideration the client’s personal preferences and priorities as well as the emotional side of the process, especially when there are siblings, children or others involved in the transition of family-owned businesses."

Getting Started
Regardless of a company’s size or the nature of its business, there are three basic questions that are paramount to successful transition planning:

  • How much longer do you want to own or work in the business before retiring, selling or transferring ownership?
  • What is the annual after-tax income you want after leaving the company?
  • To whom do you want to transfer your interests in the company?
The answers to these questions provide the foundation for structuring a business transition plan that complements your personal financial strategy, and also for putting contingency plans into place to protect against unforeseen circumstances.

Contingency Planning
This is arguably the most important step in the business transition planning process. Contingency planning encompasses the things we do not like to think about—such as an owner’s death or disability, loss of a key employee, or loss of company funding. Planning for these uncertainties creates stability and may result in your company being more attractive in value for purchase. In addition, your heirs and employees will be protected in the event that a contingency event becomes reality.

Determining the Value of Your Business
You and your advisors need to know the value of the business in order to determine whether your financial objectives can be met. A defensible business valuation also provides an additional security measure for your transfer in case of an audit by the IRS.

Even if you have had a formal valuation done, you may want to consider updating it this year. Many businesses have compressed as much as 25 to 40 percent in value over the past year. This can provide a significant estate planning opportunity for you if you are gifting all or a portion of the business to family members—you can pass more of your business at a reduced valuation for less gifting credit. While BB&T does not provide valuation services, your Wealth Management Advisor can help assess the need for an update and can provide referrals.

Protecting and Promoting the Value of Your Company
In business transition planning, it’s important to preserve the value of the business from needless taxation, protect the value of the business from creditors, and promote the value of the business through value drivers. Key employee benefits, such as deferred compensation or a bonus plan, may increase the value of your company. They can help attract and retain key talent and strengthen your successive management team. The analysis BB&T provides will focus on which plans are best for your company from a cost and value perspective.

Transferring Your Business
Typically, three options are available in transferring ownership of a company: sale to a third party, key employee purchase, or a family transfer. In some cases, the transfer encompasses a combination of these options.

“If you are selling your company to a third party, business transition planning will provide the roadmap to achieve that objective,” says Anthony Mahfood, Wealth Management Advisor, Greenville, S.C. “If you are transferring your business to a family member or key employee, our planning team will provide the analysis and support to ensure it is completed in an efficient manner.”

Working with an advisor who also handles your personal financial planning ensures that the two are fully integrated. Planning for our clients, whether discussing the transfer of their business or providing recommendations regarding their personal legacy, is a ‘seamless web.’

Legacy Planning
When business transition planning involves the transfer of ownership to a family member, there can be additional financial considerations when there are other children, grandchildren or siblings. “We help our client consider the overall legacy he or she wants to leave to their family members,” says Cindy Widner Wall, Team Director, Georgia Wealth Management. “For example, let’s say you have three children and only one has been involved in the business. If you make the decision to gift the business to that child, do you want to achieve reasonable equity in the legacy provided to the other two? There are many ways to accomplish this, and typically we encourage the client to have conversations with all the beneficiaries so they are aware of the plans and anticipated timetable for the gifting strategy.”

Periodic Reviews
Even those who have a business succession plan in place are encouraged to review it periodically to determine whether changing circumstances justify minor—or comprehensive—updates. BB&T typically reviews plans at least annually while emphasizing the importance of notifying us if there are key changes that justify an immediate adjustment or update. A business is constantly changing, as are family dynamics, financial resources and priorities. In today’s environment, there are additional complexities due to changing tax rules and potentially comprehensive pending legislation. Our bottom-line advice is to work with an advisor you know and trust, stay in close contact and communicate all relevant changes within the business and family, and ensure that reviews are done on a regular basis. In this way, you’ll have a solid plan in place that is based on objective guidance and supports your financial goals as well as the vision you have for the business itself.

Three Options for Transferring Business Ownership

Selling Your Business Outright – The sale of your business to a third party may result in capital gains tax. As long as the price is at least equal to the fair market value of the business, the proceeds will not be subject to gift tax.

Transferring Ownership via a Buy-Sell Agreement – This legally binding contract is important for contingency planning. It specifies when, to whom and at what price you can sell your interest in a business. It is especially helpful when there are co-owners, helping to prevent the business from falling into the hands of outsiders in the event of an owner’s death, disability or other specified circumstance. Typically, funding is arranged when the buy-sell agreement is set up; there are multiple funding options, including cash, private annuity, life insurance and disability insurance.

Gifting Your Business – Transferring ownership to family members during your lifetime allows you to transition control over time, if you choose, while minimizing gift and estate taxes. Gifts can be made outright, through a trust, or through a family limited partnership. Currently, annual gifts of $13,000 per recipient are tax free under the annual gift exclusion; aggregate gifts up to $1 million are tax free under your lifetime exemption.

Your business transition advisor can help you determine which of the above, or which combination of the above, will best support your personal and financial goals.


This article originally appeared in the Summer 2010 issue of Wealth magazine.

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