Brexit is the abbreviation for “British Exit,” the never-ending attempt of the United Kingdom to leave the European Union without any plan in place.
BEXIT is the abbreviation for your “business exit,” and this article will highlight some business succession planning exit strategies that every business owner should consider.
According to a study of 200 privately held businesses by Wilmington Trust in 2018, 58% of small business owners have no succession plan. Here are some common BEXIT plans for family-owned, closely held and sole proprietorship businesses:
Family business succession planning. The patriarch and matriarch of a family business have some flexibility in ownership transfer, federal estate tax avoidance, significant gifting opportunities before Jan. 1, 2026, deferral of income tax with installment sales, and other benefits with their family buy-sell agreement and revocable trust provisions. They can also maintain 100% control of all voting rights during their lifetime with a voting trust agreement.
Closely-held business succession planning. The owners of closely held non-family businesses also have flexibility with a properly documented buy-sell agreement. This agreement will include provisions for payment upon retirement (with deferral of income tax using installment payment), death (funded with term life insurance), disability (funded with disability insurance), buy-sell provisions, determination of purchase price, requirements for post-separation agreements containing non-compete, non-solicitation and trade secret protections, among other provisions.
Sale to key employees or all employees (ESOPs). Business owners can also set up a buy-sell agreement with key management employees as minority owners (and maintain voting control with a voting trust agreement).
Another option for larger businesses, involving extensive tax regulations, is an Employee Stock Ownership Plan (ESOP), and Reasor’s Foods is a great example of a 100% employee-owned ESOP.
Generally, the shareholder/owner sells all company stock to an ESOP in which all of the full-time employees are participants. The company makes tax-deductible contributions to the ESOP and uses those funds to pay the selling shareholder for the stock. The ESOP holds the stock in trust for the employees as a retirement plan. The company must redeem the employees’ shares in cash when they retire.
Lifetime sale or merger. With your business valuation from your CPA, you can list your business for sale using a business broker. You can also plan a strategic merger with another similar company, increase merged company revenues during your continued employment and plan your exit with your buy-sell provisions in your merger documents.
Trust provisions for sale/winding down of sole proprietorship business upon death. If you do not have family members, other owners, key employees, or other sale opportunities, then you should include specific sale and/or winding down or liquidation instructions to your Successor Trustee for your sole proprietorship business in your Revocable Trust.
OK, unlike the Brits, I am ready for my BEXIT, so what should I do? Get started now with these three action steps:
• Meet with your CPA (for company valuation and tax sale savings matters) and your attorney (for preparation of your revocable trust sale provisions and your buy-sell agreement with business continuation provisions).
• In these meetings, formulate your BEXIT, your business succession plan for your business for the next five years.
• Review and update your BEXIT as needed at least every five years with your team of advisers, including your CPA, attorney, financial planner/broker, insurance agent, and business broker.
Thomas M. Klenda, counsel with Hall Estill law firm, focuses his practice on franchise law, commercial transactions, business succession planning and estate and asset protection planning.