Business Transfers and Exit Planning

For many businesses, the business is a family affair. There comes a time when a business owner wants to pass the torch to a younger generation. However, transferring business ownership even within a family can be problematic. Succession planning has become an industry in itself. Why? Successfully transferring a family business has proven more difficult than any other exit path because it involves family dynamics.

Many owners of closely-held businesses want the business to go to a person or persons in their family, and/or already involved in the business.  A recent survey by Business Enterprise Institute, Inc. indicated that 65% of owners transfer their companies to insiders. Of those transfers, about 25% are to family members. The remaining 40% of transfers are to management or co-owners. While at times difficult, transferring a business to the next generation can be enormously rewarding.

A successful transfer to children or key employees requires a solid foundation provided by a properly designed and implemented Exit Plan.  A well constructed and managed Exit Plan should provide three key components:

Control - Having a plan allows an owner to stay in control until he or she receives as much of the value of their businesses as deemed suitable. This is perhaps more important in family transfers than in any other ownership transfer, since family dynamics can cause a parent-owner to place unwarranted trust in a child unproven for ownership.

Risk - An Exit Plan minimizes the risk that the owner will not achieve financial independence or the business will not succeed.

Value - An Exit Plan maximizes the transferable value (or cash flow) of the business to assure the owner’s financial independence post-exit.

At GMG, we work with a coordinated team of advisors from various fields - including business consulting, attorneys, and financial and insurance professionals - to create an owner-centered Exit Plan which provides the following to the business owner:

1. A written road map to help the business owner decide where he or she wants to go and how to get there.  It also provides a plan to minimize the income tax liability of the eventual business transfer and clearly explains the transition process to all family members and their advisors.  

2. A plan to increase the transferable value of the business both in the short term and the long term.

3. Identified and measurable steps in the exit plan so that all involved can measure their progress towards the owner’s goals.

4.  Accountability by holding the owner and each advisor to deadlines for completing each task.

5. A contingency plan for the business and the owner’s family in case the owner is no longer able to operate the business.

Sometimes the family’s wishes and the owner’s wishes can clash; the sooner you start creating an Exit Plan, the better. When the wishes of the business owner and the details of the plan are in place, the document can be used as a reference and any issues that arise can be treated as a business issue rather than an emotional one.

Asking a professional at GMG CPA about creating your Exit Plan will be a step in the direction of financial independence.  We can help you determine the importance, priority and timing of your exit and business transfer. Our trained staff can help you navigate the road to a successful transfer and your financial goals.