How to proactively approach the inevitable exit from your business

How does the planning process work?

Clients should start with something in writing, making a list of goals, which leads to the strategies for reaching those goals. It can take three or four meetings at times to write the goals down and fine-tune them.

Often, we share with them what other people have done in similar circumstances and have clients talk to each other, with the clients’ consent. It’s not legal advice, it’s more business advice, and it gives them a sense that they’re not alone.

What are some common exit strategies?

The typical exit strategies are 1) some combination of gifting and selling to the next generation, 2) a sale to employees or to an ESOP, or 3) a sale to a third party. A sale to a third party is not really succession, but you’re essentially saying that family is unable to run the company and it’s important to want to get the cash off the table and not have the business risk anymore. A fourth plan is: I’ll just wait until I die and let my heirs decide what to do. And that’s very often what happens. It’s more subconscious than conscious, but by not doing anything, that’s what happens.

From a succession standpoint, the most common plan we see is moving the business to the children. Owners gradually give their children some shares to incentivizes them, and they hang on to the business until they die, hoping that the children can take over. But clients need to have a clear plan on how the children are going to run it. Here, owners are worried not just about their children but all of the employees that have been with them for a long time.

There are many estate planning strategies to transfer businesses to children; the most common ones are a GRAT (grantor retained annuity trust) or an outright sale to the children. Sometimes there’s a combination of gifting and sales. But it always goes back to the goals and whether the client will be financially secure.

How can owners of family businesses develop a plan?

If a client’s estate consists primarily of the business and he or she wants one of his or her children to be in charge, the client is going to have a lot of complicated issues. The best plans are ones in which you give a separate area of responsibility to each of the children, and they get out of each other’s way. It’s not untypical to have a child who’s not great with sales or leadership in charge of the financial matters. Or another child might be in charge of a separate line of business.

We have a client who had four sons in the business. The father told his children that he needed to have one leader. He divided the company up evenly among the four sons, but gave the voting stock to one child and the other children received non-voting stock. The son with the voting stock is fair, he makes all the final decisions and he tries to engage his brothers when he can. And he’s in charge of their compensation, which gives them great incentive to work harder.

Chuck Kegler is a director at Kegler, Brown, Hill & Ritter, practicing primarily in the areas of Business & Tax, Mergers & Acquisitions and Estate Planning. Reach him at (614) 462-5446 or [email protected].