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March 03, 2002 at 07:00 PM
For Business Owners, Exit Planning Leads To Wealth Preservation
By Steve Parrish and John Brown
In our February 11 article, “Letting Business Owners Exit ‘In Style’,” we discussed the exit planning process–a seven-step system designed to help business owners grow their businesses so they can leave them in style.
This process is an organized way for owners to assess: personal needs, business value, likely purchasers, and tax-efficient transfer methods.
To review, the seven steps of the exit planning process are:
1. Setting exit objectives;
2. Determining value/ price;
3. Increasing business value;
4. Converting business value to cashselling to an outside party;
5. Transferring the business to children or employees for a promissory note;
6. Contingency planning for the business; and
7. Wealth preservation planning.
In the final step of the exit planning process, owners work to preserve wealth for their families or undertake what many refer to as “estate planning.” Principal Life Insurance Company’s focus group research of small and medium sized businesses reveals that owners associate the term estate planning with the very elderly or the very rich. It is perceived as either the writing of wills or tax schemes for the ultra rich. Owners rarely see estate planning as part of their own business exit plans.
When preserving wealth is presented as part of the overall exit planning process, however, owners are more willing to consider estate planning concepts and funding. Most importantly, owners feel greater immediacy regarding preserving wealth, thus enabling the financial representative to offer estate funding solutions to a receptive owner. As part of exit planning, estate planning answers a “what can it do for me?” question.
One note about the seven-step process: Some owners assume that because wealth preservation is the last step, they should exit their businesses before actively preserving wealth. As you know, if an owner waits until he converts the value of the business to cash, it is too late to realize all of the benefits of wealth preservation.
After determining exit objectives and the value of his or her business, implementing an owners exit plan often begins with the final step–wealth preservation. This is because the most significant claimant to a business owners wealth is the IRS–especially in the estate tax arena.
Lets look at how one of our fictional clients/owners worked through step seven:
George opened his meeting with us almost apologetically.
“I know Ive waited too long to begin gifting part of the company to my kids,” he said.
“My CPA told me that, based on the company’s pre-tax cash flow of $2 million per year, the company could be worth as much as $12 million to a third party,” he explained. “I had no idea!”
