Exit planning for a multi-owner business can be especially complicated due to the number of stakeholders with unique individual circumstances. The exit plan for one owner may not be identical to the exit plan for all of the owners.  This is true even in businesses owned by members of the same family (in some cases, I would say “especially” if owned by members of the same family).

Frequently, shareholder or partnership agreements may be silent as to the mechanism for handling individual situations, such as: (a) shareholder or partnership buyouts (b) retirements or (c) share transfers. In these situations, there may be an opportunity to plan for these issues before a “triggering event” such as a retirement, death, or restructuring occurs.

Below I have identified 10 high-level issues derived from actual situations which highlight factors that should be considered in planning for shareholder and partner exits from multi-owner businesses.

1. Does your multi-owner business have a valuation process in place, or does a valuation only take place when a “piece of paper” is required for compliance purposes?
2. How salable is the business? What types of offers have been received in the past for purchase of the company (if any), and how did the owners evaluate those offers? Was a “price” offered, for instance, based upon the potential buyer’s ability to obtain financing, or was it truly the “value” of the company? Was there a verbal offer from, say a competitor? Or was there a letter of intent (LOI) and a purchase agreement that later fell through?
3. Does the company have cash-basis financials with no accrual basis? Are the financials “sale-ready”? H2R’s team can assist with the preparation of various levels of financial statements to address this common concern.
4. Are there financial projections for the company, and who prepares them? Frequently different shareholders or partners have very different ideas concerning the trajectory of the company.
5. Frequently, no standard of value is stated in the shareholder or partnership agreement. There is a difference between a “fair market value” and “fair value” standard of value, especially in a contested valuation situation. “Synergistic value” is another standard of value often associated with an acquisition.
6. What is the mechanism for timing and payment of buy-ins and buyouts? Is there an earn out provision in the company governance documents? How will the transaction be funded?
7. How does owner compensation factor into the exit planning equation? Are shareholders realizing the return on their investment in the form of salary, guaranteed payments, distributions, anticipated capital appreciation from exit, or some combination?
8. What are the income tax ramifications of an exit? Should the business as a whole evaluate or reevaluate its tax entity type (partnership, S-Corp, C-Corp)?
9. What is the likelihood of an external sale of the company and realization of proceeds for the existing owners? While the price of sale may often be highest if a company is sold to a third party, are the owners in alignment on the sale process?
10. Are the right people in the room for exit planning discussions? H2R works with a range law firms, banks, insurance professionals, wealth managers and other advisors to provide informed, multi-disciplinary guidance.

Reach Out to Learn More

The 10 factors above highlight just a few of the areas which should be considered as part of the exit planning process. Frequently, these items are not considered by business owners looking to transition, especially in multi-owner enterprises.

If you have questions about designing an exit planning process, reach out to the Exit Planning team at H2R CPA. We would be happy to start putting together the right team to address your needs.

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