The Role of Attorneys in the Creation of a Successful Exit Plan

Mon, 04/06/2015 - 16:10


"I'd like to leave/sell my business. Can you help me?" How attorneys answer this question determines whether they will represent their clients and their companies in the future.

3 Responsibilities of an Attorney

Attorneys have three primary responsibilities and opportunities as members of an Exit Planning Advisor Team:

  • To inform and educate the owner about their role in the Exit Planning Process.
  • To facilitate the Exit Planning Process by working with the owner's Exit Planning Advisor to coordinate their activities with those of the owner and his/her other advisors.
  • To provide services necessary to ensure the owner's successful transition from the business.

In addition to offering counsel and insight into the business owner's overall planning, the attorney's role includes designing and drafting documents necessary to affect:

  • A transfer of ownership among family members.
  • A merger or acquisition.
  • A transfer to management or a co-owner.
  • Estate planning.
  • Stock ownership planning for key employees.
  • Key-employee incentive planning.
  • Minimizing business risk.
  • Deferred compensation planning for the owner.
  • Buy-Sell and Stay Bonus planning.

This article outlines many areas of possible involvement and work for attorneys in the Exit Planning Process. It is far from exhaustive, but it does include many of the more commonly implemented tools and techniques used by attorneys.

Step One: Setting Exit Objectives

  1. Meet with owner regarding Exit Planning Objectives.
  2. Review existing legal documents related to ownership.
  3. Help create the Advisor Team.

Step Two: Determining Value/Price

  1. Support the need for a professional determination of business cash flow and value, as well as personal financial planning.
  2. Discuss methods of reducing business value (e.g., Unfunded Non-Qualified Deferred Compensation Plan) with valuation advisor.


Step Three: Preserving, Protecting, and Promoting Value

  1. Preserve value
    1. Conduct fiscal year-end planning meeting with all Advisor Team members present.
    2. Review entity status (C vs. S).
    3. Determine applicability of Charitable Remainder Trust.
    4. Determine applicability of ESOP.
    5. Discuss use of lowest defensible value for ownership transfers to insiders.
  2. Protect value
    1. Conduct fiscal year-end legal audit.
    2. Discuss entity protection, review existing entity.
    3. Discuss and create asset protection tools (as necessary).
    4. Discuss covenants not to compete and non-solicitation agreements with key employees.
    5. Discuss and review removal of personal guarantees (and of personal assets as collateral for business debt).
    6. Discuss and use lowest defensible value in all business planning instruments.
    7. Discuss and create multiple entities for liability protection.
  3. Promote value - Implement Value Drivers and create, as appropriate, the following types of documents and plans:
    1. Incentive-based plan to motivate and keep key employees.
    2. Non-Qualified Deferred Compensation Plan.
    3. Equity-Based Plan.
    4. Stock Purchase Plan.
    5. Stock Bonus Plan.
    6. Stock Option Plan (ISO and non-qualified).
    7. Buy-Back Agreements.

Step Four: Converting Business Value to Cash - Sale to Outside Third Party

  1. Tax analysis necessary for owner’s sale of company.
  2. Due diligence required for owner’s sale of company.
  3. Negotiation of sale of business.
  4. Preparation and review of all transaction documents.

Step Five: Transferring the Business to Insiders: Children, Key Employees, or Co-Owners

  1. Participate in creating a written plan to transfer company to insiders.
  2. Draft documents affecting transfer (purchase agreement, notes, security instruments, employment, and buy-back agreements).
  3. Draft documents providing incentives to key employees not receiving ownership.
  4. Design and draft Buy-Sell Agreement among new owners.


Step Six: Contingency Planning for the Business

  1. Prepare Buy-Sell Agreement.
  2. Prepare Stay Bonus Agreement.

Step Seven: Wealth Preservation Planning

  1. Review and revise owner’s estate plan to reflect exit goals.
  2. Discuss and incorporate family business transfer considerations and wishes into owner’s planning.
  3. Consider use of GRATs, IDITS, FLPs, LLCs, CRUTs, etc.
  4. Create related entities to be partly owned by children as appropriate.
  5. Discuss and design charitable income/estate tax planning techniques and tools.