Step Five: Transfer to Management or Family Members

If a sale to a third party is equivalent to a sprint to the finish line, then a sale to insiders is the Indy 500. Why? A sale to insiders does not end with the closing. It only ends when you get paid. Those brave owners who define winning as a business transfer to family or employees, must do so in a way that keeps the new owner from crashing the car (your company) until the final payment is made. In Exit Planning, that means addressing two fundamental conditions present in this type of a transfer. First, the income tax consequences of the transfer must be minimized for both the seller and the buyer. Second, the departing owner must concentrate on acquiring maximum security for payment of the purchase price.

The reason for the emphasis on these two conditions is based on one overriding concern: The future drivers of your company — children or key employees — have no cash. With cash at a premium, effective Exit Planning means designing methods to guarantee you the company's future cash flow at the lowest possible tax cost — to you and to the buyer.

Owners must design and implement an exit strategy that creates the greatest likelihood that they will ultimately receive their purchase price. We urge owners to design exit plans to include an "out." If a transfer to children or key employees doesn't work, an owner needs the ability to sell his or her business to an outside party in order to achieve his or her original exit objectives.

Resources

Library

Transferring Wealth to Children White Paper - Successful business owners often wrestle with the issue of how to pass wealth to children in a way that minimizes — legitimately — their tax bills. This White Paper explains to owners how such a transfer can be designed, as well as why fixing their own financial objective precedes any transfer, and how to determine the amount (and if that amount is too much) to be transferred. This white paper also uses a case study to illustrate the plan design and includes an explanation of GRATs. Transferring your Company to Key Employees White Paper - Owners wishing to sell their businesses to management (key employees) face one unpleasant fact: their employees have no money. Nor can they borrow any-at least not in sufficient quantity to cash out the owner. The transfer methods described in this White Paper employ a long-term installment buyout of the owner or use someone else's money to affect the buyout. ESOP Opportunities White Paper - This white paper uses a fictional business owner to illustrate how an owner can use an ESOP to achieve three ownership objectives: 1) to cash out at fair market value; 2) to pay no taxes on the sale; and 3) to transfer the company to key employees. While examining how ESOPs work, their advantages and disadvantages, readers learn that ESOPs do not work for all owners or for every company. They do, however, provide opportunity for some owners to leave their businesses in style. "The Completely Revised How To Run Your Business So You Can Leave It In Style." See Chapter Seven: "Getting Blood From a Turnip." The Exit Planning Review™ eNewsletter You can request these materials by contacting BEI.

Team

Exit Planning Professional Transaction Attorney Business Attorney Certified Public Accountant Financial/Insurance Advisor Find An Exit Planning Professional In Your Area

The Bottom Line

If you choose to transfer your company to key employees or to family members, you must design specific tools to use in conjunction with a low purchase price to make sure you will get the cash you need for financial security. Tools include:

• Non-Qualified Deferred Compensation Plans
• Licenses and Royalty Agreements
• Indemnification Fees

There also are similar methods all designed to distribute a company's cash flow to a departing owner at the lowest possible tax cost. Developing these tools is a team effort. Seek the input and cooperation of your advisors

Go to Step Six

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