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| Issue 170 |
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Elements of a Plan to Sell to = Insiders |
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In the previous issue of this newsletter, we compared the = attributes of sales to third parties to those of transfers = to=20 insiders. We looked at the often-overlooked risk involved in = third=20 party sales and the equally overlooked benefit of owner = control and=20 payoff in insider transfers. We concede that, without planning and a well-designed = strategy,=20 sales are risky whether to a third party or to family = members or=20 group of employees. What we hope to demonstrate in this = article is=20 that owners can reduce their risk if they (with the help of = skilled=20 advisors) carefully design and implement a transfer to = insiders. Here are the essential elements of that strategy that = we=E2=80=99ll=20 discuss in more detail in subsequent issues of this = newsletter. Of=20 course, if you have specific questions or wish more = information=20 sooner, please contact us. Time. A transfer to insiders takes time=E2=80=94to = plan, to=20 implement and to pay for. Typically the more time owners = take to=20 transfer the company, the less risk they incur and more = money they=20 receive from the new owners. For that reason, the first = question an=20 owner must answer is: Am I willing to take time (typically = 3-8=20 years) to execute and complete an insider transfer? If the = answer is=20 no, then don=E2=80=99t even consider this type of plan. Defined Owner Objectives. If owners are willing to = devote=20 the time necessary for this exit, they then must define = their=20 objectives. These may include:
In the well-designed plan, these objectives are met = before=20 control is transferred. We=E2=80=99ll talk more about = various owner=20 objectives in the next issue of this newsletter. Cash Flow. Healthy cash flow is critical to any = sale. No=20 buyer, (whether outside third party or insider) wants to buy = a=20 company with anemic cash flow. In a transfer to insiders, = however,=20 cash flow assumes gargantuan importance because it is the = sole=20 source, initially, of the money you=E2=80=99ll be = receiving. Growth In Business Value. Like healthy cash flow, = buyers=20 look (and pay top dollar) for companies that continue to = grow in=20 value. In transfers to insiders, only if value continues to = grow=20 does the ownership transfer occur. For this reason, it is = vitally=20 important that owners contemplating an insider sale install = and=20 cultivate their companies=E2=80=99 value drivers before and = during their=20 exit transition. (For a quick refresher on Value Drivers, = please=20 contact me for Issue 127.) Capable management desiring ownership. Having in = place a=20 motivated management team capable of replacing you, over = time, in=20 business operations is hugely valuable to any buyer. In a = transfer=20 to insiders, that management group must also want to be = owners and=20 be willing to sign personally for any acquisition financing = or=20 ongoing company debt. Minimize Taxes. No owner wants to pay more taxes = than=20 absolutely necessary. In an insider transfer it is = imperative that=20 you and your advisors structure the sale to minimize taxes = on the=20 company=E2=80=99s cash flow (pre-tax income) Without = planning the cash flow=20 is taxed twice=E2=80=94once when the insider receives it (as = the new owner)=20 and pays a tax and pays you what is left to purchase the = company=20 from you (and again when you pay a tax on the proceeds you = receive).=20 Part of tax planning is to have the company=E2=80=99s cash = flow taxed but=20 once. Considerable tax planning and structuring is necessary = to=20 accomplish this=E2=80=94but it=E2=80=99s worth the time and = trouble as it can save a=20 third or more of the cash flow from being taxed twice. This = means=20 you can receive more money more quickly and thereby reduce = risk of=20 non-payment. Regulated and incremental transfer of ownership. = One of=20 the most important advantages of the well-designed insider = transfer=20 plan is that it gives the owner the ability to regulate how, = when=20 and the amount of ownership transferred to insiders. If = company=20 performance falters, employees stumble or if the owner = decides to=20 sell to a third party, the well-designed plan keeps the = owner in the=20 driver=E2=80=99s seat. Control. A fundamental design element of an = insider=20 transfer is to keep the owner in control of the company = until he or=20 she receives the entire sale price. There are many ways = to=20 accomplish this and we=E2=80=99ll talk about many of them in = future=20 issues. Minimize Risk. Business owners take risks every = day. They=20 don=E2=80=99t, however, like to put their own and their = families=E2=80=99 future=20 financial security at risk. For this reason, good plan = design=20 minimizes risk through strategies to maintain voting and = operational=20 control in the hands of the owner and shift operational = business=20 risk from the owner=E2=80=99s shoulders to that of the = incoming owners. Written Road Map. A successful transfer plan must = be=20 described in a written document and communicated clearly = (and=20 regularly) to the eventual owners. If the plan is not in = writing, it=20 simply is not credible and neither you, nor your employees, = will=20 take it seriously. More importantly, the written plan is the = playbook for your exit that you=E2=80=99ll use to coordinate = your actions=20 with those of your advisors (thus reducing delay and cost). = That=20 plan also lays out a timeline and provides = accountability=E2=80=94who will=20 do what, when=E2=80=94for all participants, including the = owner! Education (yours) . You need to know more about = insider=20 exits because, unlike the sale to outsiders, you will be = intimately=20 involved, indeed, you will control the business and the exit = process=20 until you=E2=80=99ve gotten all of your dough. That = education begins as you=20 read this newsletter. We will tackle each of these design elements in future = issues of=20 this newsletter. Again, if you=E2=80=99d like to discuss any = one of them or=20 transfer planning in general, please give me a call. Subsequent issues of The Exit Planning =
Review=E2=84=A2 discuss=20
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DISCLAIMER: The information contained in this = article is=20 general in nature and is not legal advice. For information = regarding your=20 particular situation, contact an attorney or tax advisor. This = newsletter=20 is believed to provide accurate and authoritative information = related to=20 the subject matter. The accuracy of the information is not = guaranteed and=20 is provided with the understanding that none of the providers of = this=20 newsletter, including Business Enterprise Institute, Inc., is = rendering=20 legal, accounting or tax advice. In specific cases, clients should = consult=20 their legal, accounting or tax advisors.
The example = provided is=20 hypothetical and for illustrative purposes only. It includes = fictitious=20 names and does not represent any particular person or entity.=20
Circular 230 Disclosure: To ensure = compliance with=20 requirements imposed by the IRS under circular 230, we inform you = that any=20 U.S. Federal tax advice contained in this communication, unless = otherwise=20 specifically stated, was not intended or written to be used, and = cannot be=20 used, for the purpose of (1) avoiding penalties under the Internal = Revenue=20 Code or (2) promoting, marketing, or recommending to another party = any=20 matters addressed herein.
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