Exit Planning

What is Exit Planning?

Eventually every owner leaves his or her business - exit planning can help you leave it on your terms. Exit planning is a deliberate, customized process that helps business owners set exit goals and decide how best to achieve them. An exit plan can help maximize your financial return when you transfer your business while minimizing your tax liability.

Even if retirement is a long way off, understanding the process now can help you run your business in a way that will make it easier to leave when you are ready. If you die or become disabled before retirement, exit planning can help ensure that your business survives and that your family receives its full value.

Your financial advisor can help you design a successful exit strategy using the following unique five-step, exit planning process

Get Started

Your financial advisor has the wealth of financial expertise to help you identify your exit goals. After determining your goals, your financial representative will work with you and your CPA, attorney and other members of your exit planning team to help you design the optimum plan.

Step 1 - Set Your Exit Objectives
When do you want to retire?
What will it take- in cash- to generate the retirement income you need?
Who do you want to succeed you?
Step 2 - Determine the Value of Your Business
How much is your business worth today, in cash?
Does your business have the stability, growth potential and strong management that increase the chances of a successful transition - to a third-party, key employee or family member?
Can your business succeed and grow without you?
Step 3 - Selling your business interest
Do you know how to get the best price and minimize your tax liability in a sale to a third party?
Do you know how to transfer your business to family members, co-owners, or employees while minimizing your tax liability and maximizing financial security?
Step 4 - Developing a Contingency Plan for the Business
Do you have a continuity plan for your business if the unexpected happens to you?
Step 5 - Family Wealth Preservation Planning
Does your family have financial security if the unexpected happens to you?
Does your estate plan address the complexities created by business ownership?

Buy-Sell

How it Works

A market is created for the business when a partner or owner dies, becomes disabled or leaves the business. This agreement establishes a predetermined business price and a buyer for the business interest. Two frequently used forms of buy-sell agreements are Cross Purchase and Entity Purchase.

Cross Purchase - Surviving business owners purchase the deceased or disabled owner's share of the business from the estate or the owner for an agreed-upon price.

Entity Purchase - The business buys the deceased or disabled owner's interest (also known as a stock redemption plan). The deceased owner's estate or the disabled owner receives an agreed-upon price, with the remaining partners then owning all the business.

Advantages

Assures a definite price and buyer under mutually agreeable conditions.
Creates an automatic market for the business interest.
Assures customer, creditors and employees of business continuity.
Active owners retain business control.

Common Types of Buy - Sell Agreements

Form of Agreement	Buyer	Suitable for	Unsuitable for
Wait and see	Business entity, co-owner, or both	Business with two or more owners	Sole proprietor and single-shareholder corporation
Trusteed cross purchase	Co-owner, Transaction overseen by trustee	Business with two or more owners, Simplifies plan, when large number of owners	Sole proprietor and single-shareholder corporation
Entity purchase (stock redemption)	Business entity	Business with two or more owners	Most expensive type
Section 302 stock redemption	Business entity	Business with two or more owners	Sole proprietor and single-shareholder corporation
Section 303 stock redemption	Business entity	Business with two or more owners, especially family business	Sole proprietor and single-shareholder corporation
Reverse Section 303 stock redemption	Business entity	Business with two or more owners, especially family business	Sole proprietor and single- shareholder corporation
Cross purchase (crisscross) agreement	Co-owner	Business with two or more owners	Sole proprietor and single-shareholder corporation, Large number of owners (gets complicated with four or more)
Option plan	Business entity, co-owner, or any eligible third party, Sale not guaranteed	Business with any number of owners, including sole proprietorship and single-shareholder corporation	Any scenario where guaranteed sale is needed
One-way buy-sell	Business entity, co-owner, or any eligible third party	Business with any number of owners, including sole proprietorship and single-shareholder corporation	Sole proprietor with no willing buyer

No Sell Buy-Sell

How it Works

After determining the value of the business, an irrevocable trust is established that is generally funded with life insurance equal to the value of the business. Upon the death of the owner, the trust purchases the business interest from your estate. The designated trustee controls the business interests and continues to manage the business until the interest is distributed to family members or until the right time to sell.

Advantages

If you die, the trust purchases the business interest from your estate. Insurance proceeds are income and estate tax free under current law.
Creates survivor income for your family when a buyer isn't available.
Avoids facing a liquidation of the business at a reduced price.
Owner's estate gets fair price.

Employee Stock Ownership Plan (ESOP)

How it Works

Stock is acquired by purchasing it directly from the company or from its stockholders. The stock, cash or other investments are allocated to the employee's accounts in proportion to their compensation and held in trust. Distributions are determined by the employee and plan administrator and distributed to them or their beneficiaries at retirement, termination of employment, disability or death.

Advantages

Provides a friendly buyer for the stock.
Owner retains control of the business.
Employees participate in the growth of the business.
Owner can defer the tax on capital gain realized when shares are sold to the ESOP if proceeds are reinvested in qualified replacement property within a replacement period.^*

*The replacement period begins three months before the sale and ends 12 months after the sale.

Family Limited Partnership (FLP)

How it Works

FLPs are used to shift income and appreciation to your children. Assets are placed in an FLP in exchange for general and limited partnership units that are given to children or grandchildren. The partnership interests give them ownership, but no right to control activities. To achieve income, estate and gift tax advantages, the partnership should be funded with appreciating assets or assets that generate a current income stream.

Advantages

Reduces taxable estate by giving away assets while retaining control of the assets and the income they produce.
Owner doesn't give up control of assets and can receive a salary for management duties.
If life insurance is a partnership asset, only a portion of the proceeds that relate to the ownership interest will be included in the estate.

Disability Buy-Out Insurance

How it Works

A need is created for the business if you or a partner(s) were to become disabled. A buy-sell agreement establishes a predetermined business price and a buyer for the business interest. Disability buy-out insurance is commonly used to help provide the funding needed for the buy-sell agreement.

Advantages

Assures a definite price and buyer under mutually agreeable conditions.
Creates an automatic market price for the business interest.
Assures customers, creditors and employees of business continuity.
Active owners retain business control.
Assures funds are available to execute the purchase.

Disability Overhead Expense Insurance

How it Works

Reimburses the owner for covered overhead expenses up to a specified amount during a disability. It covers fixed business expenses such as:

Lease, rent or mortgage payments
Utilities
Liability insurance
Property taxes
Accounting and legal services
Professional trade dues and subscriptions
Other fixed expenses normally incurred in running the business

Advantages

Helps meet routine business expenses and allows the business to remain open.
Assures customers, creditors and employees of business continuity.
Policy premiums are tax-deductible as an ordinary and necessary business expense.

Your next step

The above are the general types of buy-sell agreements but there are numerous specific kinds of Buy/sell agreements. Some are funded with Life Insurance for specific financial, legal and tax reasons. Depending on your organizational structure, Tax and Benefit considerations are of primary importance.

Please feel free to contact us with your specific situation.