October 2006 Final Exit Strategy The who, where and how much of passing along the business before passing on By Nancy Tujaque
Planning for the disposition of one’s estate can be a complicated process, requiring expert advice and careful planning. But when one’s estate also includes ownership in a business—be it sole proprietorship, partnership or the family business—the stakes are even higher. After all, this is a once-in-a-lifetime event—if you don’t do it right the first time, you won’t get a second chance.
Though planning for the transfer of one’s business can be a formidable task, ultimately, it all comes down to a few crucial areas: Assembling an advisory team, valuing the business, and determining who you want to own it as well as how you intend to transfer ownership.
Team Work
“It’s very important for people to get the right team around them,” says Dan Holbrook of Knoxville’s Holbrook and Peterson. Employing the help of lawyers, accountants, financial advisors, brokers and public relations officers may appear an expensive addition, but their fees will be minimal compared to what you might incur on your own. Professionals also can provide objective advice in even the most emotionally charged environment.
Value Judgment
How much is the business worth? The best way to find out is to have the value of the business verified by a professional. In doing so, you can be certain that your team of advisors has all of the right numbers from which to work. A valuation will also help you determine both the relationship of your business to the rest of your estate in addition to the direction in which you will want to proceed with your planning.
Johnson City attorney Lee Davis identifies another benefit of an early valuation. “Many people believe that their assets are worth more than they really are,” he explains.
The Hand-Off
With the value of your business verified, you will want to approach your team of advisers with a good understanding of how you wish to relinquish control of your interests. Holbrook identifies the basic recipients to consider for the transfer as children, especially those involved in the business, and joint investors or shareholders. “If you have no co-investors and you want to keep the business going,” Holbrook elaborates, “then you can make arrangements for [key employees] to buy [the business] out when the time comes.” Holbrook stresses the importance of hammering out these details early on, as issues are often exacerbated upon death.
If you have decided to transfer your ownership or assets over to your children, the general rule, says Tom Buckner, a lawyer at Apperson Crump & Maxwell in Memphis, is to do what you can to have the business valued lower for tax purposes. “You may want to carefully explore the option of having the business owned in a manner that will permit the discounting of the value of the business for estate tax purposes,” he says. There are a number of discounts and exemptions that can be used depending on your specific situation, and your advisers will help to identify those. The most effective strategies involve the transferring of business interests over to the next generation before the interests become too valuable. Holbrook cites the Sam Walton model to demonstrate the effectiveness of this strategy. “A good entrepreneur or businessman,” Holbrook explains, “will know how to make the business grow over time. By giving it away early, they have saved a great deal of money since the value is much less at the time of transfer than it will be down the road.”
With family-owned businesses, consider consulting a family-business expert who is skilled in business development, as well. As a consultant on site, they can expedite the process by resolving family issues and ensuring that all beneficiaries receive assets of equal value.
There’s an important difference in valuation goals between passing along a business to heirs versus selling the business with the aim of giving the proceeds to those same heirs. While in transferring a business, one wants as low a valuation as possible, as a seller, you will want to receive the highest value for your business in order to get the largest amount of money for your beneficiaries after taxes. If there are several owners or investors, it is usually best to establish a unanimous agreement beforehand regarding buyouts and the insurance policies used to finance them.
Planning + Sooner = Better
If possible, you should incorporate your exit strategy into your business plan from the beginning since it will affect many of your key business decisions.
Buckner recommends that clients be as explicit as possible regarding the transfer of ownership when drafting the agreement, whether a corporation is purchasing your stock or you are selling your share of the company to your co-investors. Include specific stipulations in the agreement to prevent certain actions that you do not want to be taken. Lytle Nichol, a Memphis lawyer with Evans and Petree, advises clients who wish instead to pass their assets on to their beneficiaries to make sure that there is language in the documents that permits that choice (since that is not often the case).
When working to build corporations or LLCs, Davis routinely adds buy/sell provisions to the business plan. “It is best to do it right now while the partners are still friends and want to be fair to each other. We work through scenarios and talk about payment terms, so that if something were to happen, they would have an exit strategy that was agreed upon beforehand by all parties.”
For those concerned with maintaining a certain level of discretion during the proceedings, “the good news is that Tennessee probate laws allow for confidentiality for passing things at death, no matter the format,” Holbrook says. “Confidentiality is usually not a problem unless someone files a lawsuit, which is very rare.”
Ultimately, like so many things in business as well as life, a pebble planned for can avoid an avalanche of issues later. And so much the better, since no one wants a final exit to merely be the start of problems for those left behind. tn
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