Down Market Presents Exit Strategy Opportunities For Business Owners

Case scenario

Consider the following example: Joe Businessman's company is worth $10 million. Given the current economic climate, he decides to sell 70% of his ownership to an outside investor. He thereby not only gains $7 million (less taxes), but he still has a hand in the operation of his company. And by bringing new blood into the management structure, Joe could set the stage for future growth once the economy rebounds. If, in a few years, that occurs, Joe could cash out entirely. If the company grows successfully, his remaining 30% stake could be worth significantly more than at the time of the initial transaction.

A second path business owners may consider in these trying times is to execute an internal transfer to insiders, such as family members. If family succession is the objective, this path can be particularly attractive now given that gift taxes have the possibility of being diminished due to lower than normal valuations.

Business valuations today are generally lower than they were just a year or two ago. This is due to a combination of sales performance, profitability, tightening of the credit markets, and lower multiples across the boards. This provides an outstanding opportunity to transfer ownership interests to family members through a variety of techniques, such as installment sales, gifts, grantor retained annuity trusts (GRATs), and sales to defective grantor trusts.

With today's low interest rates, many of the techniques work even better. In fact, even if your client's objective is to sell to outsiders in the future, he or she can engage now in pre-deal recapitalizations and intra-family transactions to shift ownership and save taxes when the business is sold.

This could also be the best environment in which to sell the business to employees, either through a management buy-out with select key managers, or through the use of an employee stock ownership plan (ESOP). Again, lower valuations equal better economics for buyers and potential tax savings.

A silver lining

So stop with the doom and gloom and bring news of this silver lining to your clients! We may not see such planning opportunities for many years to come. Now is the time to help business owners lay the groundwork for the inevitable exit from their business on a proactive basis.

Without a doubt, the current economy is troublesome. But for some, particularly small business owners who have decided to work closely with trusted financial advisors, there could be no better time to design their exit strategy.

Daniel A. Prisciotta, CPA, CFP, PFS, ChFC, is founder and managing partner of Equity Strategies Group in Rochelle Park, NJ, and is affiliated with Sagemark Private Wealth Services. He is also a registered representative offering securities and advisory services through Lincoln Financial Advisors. His e-mail address is [email protected]