Category Archives: Exit Planning

For some business owners, it may be useful to continue to manage your business, but to take out some of your equity by selling part of your company to private investors.

This exit strategy is appropriate for a business owner who wants to continue to run the business, but would like to take out some of the value of the business before they sell the entire business. Typically this is accomplished by working with a private equity fund, who purchases a controlling interest in the company.  Most private equity funds who participate in this type of recapitalization transaction want the owner to stay on and run the business.

During the preparation phase leading up to a sale transaction, one should consider have disability insurance to protect both the company and your family.

Different types of disability insurance can be purchased to:

1. Provide ongoing compensation to the owner, in lieu of salary
2. Generate payments to the company to offset lost business
3. Generate payments to the company to cover overhead expenses, such as debt, rent, and utilities

For a family involved business it may be appropriate to create a Family Council as part of the exit planning process. This council would consist of all family members working in the business or impacted by the sale or business transition.

The Family Council creates a forum where issues can be discussed outside of the business environment and where plans can be privately communicated to the council.

Often a step missed in planning for the sale of a business is for the seller to conduct an accounting and legal due diligence process on their own assets and legal documents. 

The review should include all the following:

1. Reveiw of financial reports to confirm that they accurately describe the revenues and profitability of the business.
2. Review of leases, loan documents or any other asset to confirm that everything is in order.
3. Review all intangible assets to determine if copyrights or patents should be filed.
4. Review customer and supplier contracts to see if they are still current and up to date.
5. Review any other legal or accounting documents that may be a source of representations of the seller to the buyer.

The purpose of this review is to make sure that there are no surprises in statements, representations, or warrants made to a potential buyer.  All little mistake in misrepresenting the selling company could easily chase off a qualified buyer.

Make sure that key employees stay around until the exit event and sometime even afterwards.  There are a number of techniques that can be used to incentivize key employees to stay until the exit event. 

Contingent bonuses or the issue of phantom shares in the company are two examples.  Also the buyer of the company may want the owner and key management members to stay for a period after the sale of the business.  This can also be handled with bonuses or phantom shares.