Most business owners believe that an ‘external’ sale of their business is their only (or at least best) Exit Alternative. Typically this is because business owners know that their employees and/or fellow family members don’t have the type of money required to secure a successful exit plan for them. So often times, business owners approach ( view or see) the topic of Exiting a business as meaning that they need to sell their business to an outside buyer with enough money to pay them what they want.
So while an ‘external’ sale is intuitively appealing, it’s my experience that an understanding of ‘internal’ transfers will help open up a very good dialogue with a business owner so that they can understand all their options and make a well informed decision. In fact, analysis of an ‘internal’ transfer of the business can be a powerful alternative to a business owner looking for an Exit Strategy. And, depending upon the business owner’s motives, it may be the best alternative available.
‘Internal’ transfers of ownership in a business are often times overlooked because they are not intuitively understood by the business owner and/or the business owner’s advisors. So let’s examine some of the ‘internal’ transfer methods that are available to a business owner to illustrate the benefit of a well-conceived Exit Strategy.
‘Internal’ transfer methods include Employee Stock Ownership Plans (ESOP) Transfers, Management Buyouts (Sales to Family and Management), Gifting Strategies, Private Annuities, Family Limited Partnerships, and Charitable Transfer Strategies. The three (3) primary differences between these ‘internal’ transfer alternatives versus (and the) ‘external’ transfer alternatives are:
(i) the corporate assets, including future cash flows, are leveraged to
achieve these strategies,
(ii) the driving force behind these ‘engineered’ strategies is a business owner’s motive of passing the business to someone other than an outside buyer, and
(iii) the business owners will frequently be considering tax planning and estate planning along with their Exit Strategies. ‘Internal’ transfers, as a general rule, allow for more flexibility in these areas than ‘external’ transfers.
A business owner considering an ‘internal’ transfer can set the price and terms for the transfer and say to their family and/or management team, “Here is what I want/need for my business". For this reason, ‘internal’ transfers are often referred to as ‘controlled’ transactions because the business owner is working with ‘assets’ that they already possess in structuring their Exit from the business. So if those ‘assets’ are sufficient to achieve that business owners’ goals (based on their motives), then it is worthwhile to examine an ‘internal’ transfer.
Specializing in Business Exit Strategies, John M. Leonetti, Esq., M.S. Finance, CM & AA founded Pinnacle Equity Solutions, Inc. to provide advisors with the tools they need to incorporate Business Exit Planning into their advisory practices. To learn more about John’s Exit Strategy Services and to receive a FREE copy of his special report, “How To Incorporate Exit Strategies Into Your Advisory Practice", visit www.PinnacleEquitySolutions.com
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Article added to SearchWarp.com on Thursday, October 18, 2007 View other articles written by John M. Leonetti(28)
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