Fall 2014 issue of Horizons

For a middle-market business, especially one in the first generation of family ownership, the owner’s exit is often the last item on a lengthy priority list.

And it often remains untouched until advancing age, a health issue, or another inopportune event forces the issue.

This can be a recipe for value destruction. Just as a prudent business executive would not ignore the phone calls of its largest customer, a business owner, who likely has the bulk of his or her net worth tied up in said business, should not put off the necessary planning for his or her eventual exit. Successful exits take discipline, focus, effort, and—perhaps, most of all—time. But all of the dutiful preparation is worth the investment, as being prepared to sell your business when you don’t have to, can put you in a powerful position to dictate the timing and terms of your exit.

Therefore, business owners should begin planning for their exits years ahead of time and, if you have not already begun so, perhaps today is the time to start thinking about your exit strategy.

Build a Capable Management Team (That Can Run the Business Without You) A saleable business is one that can operate independent of its founder/owner, whether now or after a transition period post-exit. Many first generation businesses are highly intertwined with their founders, who maintain the bulk of customer relationships and who can operate the business successfully without many of the checks and balances present in businesses which have changed hands.

These situations often present challenges to prospective buyers. After all, a prospective buyer is not looking to acquire a business in which one person is the key cog keeping it all together.

In the years ahead of a potential exit, it is advisable to entrust employees with increasing responsibilities, such that over time you build a team of trusted employees that can make critical business decisions without you. This does not mean that an owner shouldn’t be involved in the business by the time he or she is ready to sell; rather, it means that he or she has created a business that can succeed on its own merits. Optimize Your Tax Positioning Often, the terms of a sale agreement will dictate how an exit will be taxed. While there is plenty of room for negotiating these finer points, it is advisable to first put the business in an optimal structure for an eventual exit. The legal structure of a business can significantly impact the taxation of a proposed sale transaction. If the business is organized as a C Corporation, the owner may prefer to sell stock in the corporation in lieu of the underlying assets. This is because a sale of C Corporation assets will produce two levels of tax—one level of tax at the C Corporation on the sale of the assets, and another level of tax at the shareholder level when the sale proceeds are distributed.

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