Articles Tagged ‘Financial planning’

The Importance Of Time In An Employee Buy Out

Monday, January 9th, 2012

Presented by T. Ray Phillips

Many, probably most, business owners would like to sell their businesses to their employees, but for one nagging problem: Their employees have no money.
The desire to sell to employees collides with the owner’s overarching need for financial security. Owners simply cannot risk selling a business to employees who have no cash.

Take James Johnson, the fictional owner of fictional company Johnson Consultants, Inc. James’s management team was capable and interested in buying the company. The business had little debt and good cash flow.
When James met with his advisors to discuss the topic, one of their first questions was, “When do you want to leave the business?”
If James answers, “Now!” a sale to employees who lack cash is fraught with risk. If James’s answer is, “I’d like to be out—and cashed out—of the business in five to eight years,” a well-designed exit plan can make that happen—if James starts today.

Plan Goals Any buy-out plan must accomplish three goals:

1. Minimize the owner’s, the company’s and the employees’ risk, by keeping
the owner in control of the business and the sale process until the owner receives the entire purchase price.
2. Ensure that the owner receives full value for his or her ownership
interest.
3. Minimize the income taxes of both the owner and the employees.
Unless a buy-out plan meets these goals, owners would be wise to reconsider selling their companies to their employees. If, on the other hand, owners plan and begin to execute a transfer plan well in advance of their departures, they can achieve these three goals. Of course, special planning is required to meet the income tax minimization goal.
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