ownership transition Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer as well as Corporate Transparency Compliance

Exit Planning is a Misnomer

May 21, 2025 By Rick Randel

Rick Randel Exit and Succession Planning

I suspect the main reason many business owners put off exit planning is they don’t like the word “exit”. For many, their business isn’t just a job; it’s a huge part of their identity and their reason for getting out of bed every morning. So the word “exit” conjures up images of being put out to pasture, or facing a future with nothing to do but lie around the house or play golf every day.

But “exit planning” is really a misnomer. It’s not about leaving, it’s about building a stronger, more successful, transferable business. It’s about ensuring a smooth transition and the continuity of the enterprise you’ve worked so hard to build. And here’s the best part: engaging in this kind of planning almost always increases your company’s revenue and profits.

The Benefits of a Success(ion) Mindset
When you reframe exit planning as success(ion) planning, you unlock immediate advantages that benefit you and your business long before any actual exit. This proactive approach focuses on:

Building a More Valuable Business: Success(ion) planning identifies and strengthens your business’s value drivers. This includes hiring, training, and appropriately compensating key team members who can take on more responsibility, making your business less dependent on your constant oversight and more attractive to potential investors or buyers down the line.
Achieving Greater Flexibility and Work-Life Balance: Want to slow down, take a step back, and let others run the day-to-day operations and work the long hours? Success(ion) planning allows you to do just that, giving you more time for personal pursuits while still reaping the rewards of ownership. You can reduce your hours, take extended vacations, or simply enjoy less day-to-day stress without exiting the business.
Generating Liquidity When You Need It: Life happens. Whether you need to pay for college tuition, buy a vacation home, cover a parent’s skilled nursing care, or fund a trip around the world, success(ion) planning can provide options to fund those endeavors. This might involve selling a minority stake to a pre-designated senior manager or group of managers, giving you access to capital without giving up control or exiting the business.
Reducing Taxes: Bringing in your tax advisors as part of the success(ion) planning process can greatly reduce income and/or estate taxes, ensuring that more of the wealth you’ve built stays in your pocket to fund your retirement, or passes more efficiently to your loved ones, rather than going to Uncle Sam or the FTB.

Planning for Future Scenarios

While many benefits of success(ion) planning are realized while you’re still actively involved, it also prepares for those scenarios where you might, either gradually or suddenly, step away from the business. A comprehensive plan ensures continuity and minimizes disruption, no matter how or when that transition occurs:

Your Planned Retirement: For owners who do eventually decide to retire, having a well-crafted plan in place is invaluable. Think of how many business owners wait until after they’re burnt out, only to realize they now have to work another 2-5 years just to get their business ready for transition. Success(ion) planning prevents this stress, allowing you to transition whenever you decide to. You will have already groomed the next generation of owners who can buy you out and take over the business when you retire.
Leaving on Your Own Terms (or Not at All): Perhaps you decide to continue working indefinitely, even into old age. With a success(ion) plan, you’ll have a clear framework and a strong team in place to ensure that clients continue to be cared for, employees maintain their jobs, and your legacy remains intact.
The Unexpected Departure: We’ve all heard the tragic stories: owners who suddenly drop dead or suffer an incapacitating illness, leaving their spouse or unprepared employees to try to keep the business afloat. Those who have engaged in success(ion) planning have a contingency plan in place. This foresight ensures the business can continue smoothly, alleviating immense pressure on grieving family members, safeguarding client relationships, and protecting employee livelihoods. Even if you feel like it’s too much trouble, don’t do it for yourself, do it for them.

Plan for Success, Not Just an Exit

So maybe it’s time we stop calling it “exit planning” and start calling it “success(ion) planning”. After all, “success(ion)” has the word “success” built right into it, and that’s precisely what this type of planning ensures: the ongoing success of your business, your legacy, and your future.

This post is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

How to Exit a Business Without Leaving

January 9, 2015 By Rick Randel

Many business people think the term “exit” means selling the business to a third party. Many other options are available. In fact, the term “exit” doesn’t necessarily mean leaving the business at all.

Only a small fraction of owners succeed in actually selling their business to a third party. Owners often think their business is worth more than what a buyer is willing to pay. Many times the business simply isn’t saleable, or cannot be sold for enough money to fund the owner’s retirement. The books may be a mess; or the business may be too dependent on the owner’s involvement. If the owner begins the process early enough, these issues can be addressed and the business can eventually be sold. In other cases, the owner can’t wait that long and needs cash right away. This scenario is a potential candidate for an Employee Stock Ownership Plan (ESOP), a management buy-out, or a private equity group recapitalization (PEG recap).

GRADUAL OR PARTIAL EXITS
Gradual or partial exits are excellent options for owners who want to unlock some of the equity in their business, but want to continue running the business for an extended period of time. An owner who isn’t ready to retire may still be driven to grow the business she founded. But she may need cash to fund a significant expense, such as kids in college, caring for aging parents, etc. Or perhaps additional capital is needed to diversify or expand the business. These situations are potential candidates for a PEG recap or a leveraged ESOP.

Change the above facts slightly so the owner doesn’t need to raise cash now. But she realizes she will be leaving the business some day, and wants to plan ahead and do it on her own terms. She wants her eventual exit to be as tax-advantageous as possible, and/or wants to see her senior management team take over the business when she leaves. These are ideal scenarios for an ESOP or ownership transition plan, or even a gifting/estate planning solution.

PRESERVING THE MISSION
Perhaps the owner is ready to retire, but doesn’t want to hand his “baby” over to an external buyer, who may not preserve the owner’s mission or values. He may be concerned the buyer will lay off some of his valued employees, or simply not treat them or his customers the way he thinks is best. If the owner has valued senior employees who have expressed an interest in taking over the business when he retires, this is an ideal opportunity for a management buy-out or ownership transition plan.

In other cases, an owner may want to keep the business in the family. One or more of his children may be involved in the business and willing and able to take over. A sale to a third party is obviously inconsistent with that goal. However, employing gifting and estate planning techniques will help achieve the owner’s objectives.

Business owners who fit any of the above scenarios have many options other than selling their business. They should seek the counsel of a qualified exit and succession planner to work with their business attorney, CPA, and other advisors, depending on the options being considered. The process requires bringing in advisors at an early stage to conceive and execute a plan, which usually occurs over a period of several years. Owners with enough foresight to start this process early on will see that the term “exit” doesn’t necessarily mean selling their business to a third party, and in some cases, doesn’t mean leaving the business at all.

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

Building Liquidity into Your Buy-Sell Agreement

May 4, 2014 By Rick Randel

In a previous issue we met “Chuck,” a successful business owner looking to monetize his investment in his business. The liquidity tool that Chuck and his advisors ultimately chose was the Ownership Transition Plan (click here to read that issue). Now I would like to introduce you to “Carol” and “Ahmed,” who were also looking for liquidity, but farther in the future. Carol and Ahmed were younger than Chuck and didn’t have any current candidates for ownership. But they were wise enough to plan ahead before their liquidity needs arose. After considering the various owner liquidity tools, we decided to build liquidity into their buy-sell agreement, There are many ways to build liquidity into your buy-sell, including:

Mandatory repurchase upon death or disability
Repurchase upon reaching certain age
Repurchase upon retirement
“Put” right

If you have attended one of my seminars, you have heard me speak about the “two universes” of buy-sell agreements. In one universe (typically small start-ups with little built-up value and young founders), the buy-sell is purely a tool for restricting transfers of shares so the owners don’t wind up partners with someone they don’t know or can’t work with.

Mandatory Repurchase upon Death or Disability

In universe two, in addition to restricting transfers, the buy-sell sets up mechanisms to take care of the owner’s family should the owner die or become disabled. This universe usually involves mature businesses with significant value, the owners of which have families they want to provide for. Either the company or the other shareholders must purchase a co-owner’s shares upon death or disability. The company or the other shareholders often take out life or disability insurance on the other owners to fund their obligation to repurchase shares. This is an excellent means of providing liquidity for an owner’s spouse or children, should his or her income suddenly go away. It is particularly appropriate where neither the spouse nor the children are involved in the business.

Repurchase upon Reaching Certain Age

The buy-sell also can provide liquidity to owners by including mandatory repurchases of shares upon reaching certain ages. For example, any owner who reaches the age of 65 may sell up to 20% of his or her shares per year for the next 5 years. The company is required to make the purchase. The owners can decide what age triggers the requirement and what percentage of shares is purchased each year. The agreement should allow them the flexibility to waive the provisions or negotiate variations for each individual owner, as circumstances dictate.

Repurchase upon Retirement

The buy-sell agreement can also require the company to repurchase an owner’s shares upon retirement. Some owners have no problem with their partners continuing to own an interest in the business after retiring. Others (particularly in service businesses) feel like once someone stops contributing to the business, they should no longer own shares.

In all of the above cases, the company typically has the option to pay a certain percentage of the purchase price (typically 20 or 25%) in cash, and the remainder over several years (with interest), thereby providing a nice income stream to the departing owner. If the purchasing party receives insurance proceeds, however, they must remit all of the proceeds to the selling party. The agreement often imposes an annual “cap” on the amount the company must pay (typically a percentage of revenue or net income), to avoid straining its cash flow. Payments that cannot be made because of the cap are deferred.

Put Right

In rare cases, the buy-sell agreement can even provide for a “put” right, where any owner can require the company or the other owners to buy him or her out at any time. The repurchase price would be determined by a formula set forth in the agreement. This is much less common than the above options, primarily because co-owners don’t want the company to have to buy out another co-owner for no reason other than the owner wants out.

Carol and Ahmed decided to include all of the above tools in their buy-sell, other than the put right. Their company is required to buy their shares upon retirement, or when either of them reaches age 67 (at 20% per year over 5 years). They also included mandatory repurchase upon death or disability, and had the company take out life insurance to fund the repurchase upon death (they decided disability insurance was too costly). In the end, they wound up with a buy-sell agreement that builds in numerous tools for owner liquidity when needed.

If your buy-sell agreement (you do have a buy-sell, don’t you?) doesn’t provide you with liquidity, perhaps it’s time to have it revamped. Even if you feel your buy-sell is up to snuff, remember to have its terms (and the amount of insurance covering purchase obligations) reviewed every few years to make sure it is keeping up with changes in ownership, the value of the business, and the ages and family situations of the owners. The Randel Law Office would be happy to help you with this process.

Ownership Transition Plans: Converting Business Value to Cash for Owners

October 4, 2013 By Rick Randel

A business owner’s investment in the company often represents the biggest asset in his or her portfolio. Sometimes the owner needs to access the cash locked into that value, whether to meet an emergency, fund retirement, or diversify. In one real-world example, Chuck (not his real name), the founder and owner of a successful business with annual revenue around $8 million, was in his 60s when his daughter got into Stanford. Around the same time, he realized he hadn’t saved enough for retirement, Although Chuck had a decent portfolio of investments, his most valuable asset was his business. Chuck began to wonder how to unlock the value wrapped up in his company.

He could just sell some shares. However, because his company was privately held, he couldn’t just instruct his broker to sell on the open market. He would have to find a buyer in the private market, which can be difficult. And even if he could find a buyer, the sale would have to comply with state and federal securities laws. (And although this didn’t apply in Chuck’s case, when there is more than one owner, the sale has to jump through all the hoops required by the company’s buy/sell agreement.) And on the tax side, Chuck’s entire gain would be taxed in the year of sale.

Solutions for Owners

Because private sales can be so challenging, expert legal and financial advisers have designed alternative ways for business owners like Chuck to tap into their business investment. Chuck’s team considered several options:

Adopt an Ownership Transition Plan (also referred to as a management buy-out)
Use the Buy/Sell Agreement for Liquidity
Sell the Business (merger/acquisition)
Adopt an Employee Stock Ownership Plan (ESOP)

This article focuses on the Ownership Transition Plan, a formal arrangement where the current owner or owners sell their stock to the next level of “up and coming” leaders in the business, over a period of several years. This requires a “next generation” of qualified, hardworking senior team members who are good rainmakers and leaders, and are committed to the success of the business. Ownership Transition Plans are ideal for service businesses. Professional design firms (e.g., architectural, engineering) use them frequently to seamlessly transition ownership within the firm. But they can be used successfully by businesses in any industry. Other benefits include:

Deferred Compensation

In addition to receiving cash from the buyers, the owners may also receive cash from the company in the form of deferred compensation. Because it is a liability of the company, deferred comp lowers the company valuation, making the share purchase price more affordable for the buyers. Although taxed at ordinary income rates, the deferred compensation is usually “grossed up” to balance the impact. And the gain on the sale of shares is spread out over several years, rather than accruing in the first year.

Employee Incentives

Ownership Transition Plans also give businesses a competitive edge in employee recruitment and retention. Companies with a plan are better able to retain motivated employees who might otherwise leave and/or start a competing firm. Equally as important, the business is positioned to attract top talent for whom an established Ownership Transition Plan represents a path toward an equity or ownership position.

Let’s get back to Chuck. Under the Ownership Transition Plan his company adopted, in the first round Chuck sold 3% of the outstanding shares to each of 5 senior employees for $90,000 each. This meant $450,000 to Chuck for 15% of his business. He received 20% in cash up front and the other 80% will be received, with interest, over five years. He will be taxed as the money is received. Additional rounds are anticipated as Chuck gets closer to retirement. With a secure plan in place, the generation purchasing from Chuck will eventually sell to the next generation, thereby assuring the continuity of the business.

Chuck’s plan involved adopting a company shareholder agreement and other documents including an offering memorandum to the purchasers. The plan wasn’t cheap and took more than a year to implement. But in the end, Chuck’s investment in an Ownership Transition Plan meant he could access the value locked into his business and assure its continued success.