Exit Planning Consulting for Attorneys. Where to Start?

Key Takeaways:

  • Attorneys are critical members of a high-performing exit planning advisory team.
  • Owners lean on attorneys at all stages of planning and successfully achieving a transition.

Preparation is the key to any successful transition. A good exit plan means having the right team beside you, who can support you throughout the exit process by helping you stay on course. A strong exit planning team usually combines a variety of advisors – strategic consultants, sales/marketing experts, financial advisors, accountants, and, of course, attorneys. Firm attorneys play pivotal roles in the exit planning process.

A good exit plan involves an extensive analysis of all the factors that could impact the owner. A well-structured exit plan helps the business owner diversify wealth while lowering the risk of having all family wealth in the business. Attorneys offer counsel and insight into the business owner’s overall planning. They assist throughout the early stages of planning, during the due diligence period (if the owner is pursuing an external sale), transition planning, and through execution of a deal.

While some business owners wish to exit their business all at once, others prefer to liquidate a part of their business and hold on to the rest to obtain higher returns later as the business becomes more successful (and, in turn, more valuable). Often, entrepreneurs turn to their attorney as a part of the exit planning advisory team to help determine the exit strategy that works best for them.

Attorneys also contribute towards estate planning, buy-sell and stay Bonus planning, key-employee incentive planning, a transfer to management or a co-owner, deferred compensation planning for the owner, stock ownership planning for key employees, and a transfer of ownership among family members.

Seven areas attorneys contribute to the Exit Planning Process

There are many areas of involvement and work for attorneys in the Exit Planning Process.

  1. Determining transition objectives
  2. Preparing for a transaction
  3. Determining current value and required future value
  4. Protecting and driving value
  5. Sale to a third party
  6. Internal transfers
  7. Wealth preservation planning

#1 – Determining transition objectives

In the early stage of a relationship, entrepreneurs often lead on their attorney the exit options available to them (a sale to a third party, a management buyout, equity infusion, an internal transfer, etc.) based on what’s happening in the business (a lifestyle change, business failure, market uncertainty, retirement, etc.).

At this stage, the attorney reviews the company’s existing legal, financial, and other essential documents. He also contributes towards creating a suitable advisory team for the business owner.

As an exit planning advisor, the attorney helps business owners articulate their unique personal and family goals concerning financial security, legacy, family succession, feelings about their employees, taxation, company relinquishment, charity, etc.

Depending on the owners’ risk appetite, willingness to bear risk, the time when the owner needs to get cash, and the time that the owner allows for planning, the advisory team chooses a suitable exit strategy.

#2 – Preparing for a transaction

As due diligence plays a vital role in the exit process, even from the initial stages of exit planning, attorneys ensure that every business document, such as contracts, deeds, disclosures, agreements, licenses, reports, etc., are updated and correct.

They make sure that:

  • The company has issued shares in compliance with state and federal securities regulations.
  • Contracts identifying and protecting critical assets are in place. These include Technology License Agreements, Employment Agreements, Restrictive Covenants, Non-Disclosure Agreements, and Employment Termination Agreements.
  • The taxing entity of the company is such that it is optimal for an acquisition. For example, is it a C corporation, S corporation, LLC, or any other entity?
  • The company’s shares are properly authorized via formal resolutions and paid for.
  • The stock records and corporate documents are updated regularly.
  • The records of different business activities are maintained separately and accurately. It helps diversify risk and increase the value of legal entities while making it possible for the business owner to retain a part of the business.
  • The company complies with employment laws such as wage and hour laws, OSHA, equal employment opportunity laws, ERISA, etc.
  • Employment policies are updated periodically, and records are diligently maintained.

#3 – Determining current value and required future value

Entrepreneurs often lean on their attorneys for recommendations on how to determine the present value of the business – either by requesting a referral to a valuation consultant or by some other means (such as Value Scout).

At this stage, entrepreneurs frequently realize they have a value gap – the value of the business today doesn’t meet their retirement needs. The company is not growing value fast enough to create enough value at the target future date.

The moment an entrepreneur becomes aware of a value gap –particularly a significant one – they begin to lean on their advisory teams for help in identifying ways to close that gap.

Attorneys often identify potential risks within the business that, if mitigated, can assist in recapturing value. Often, business owners have unfunded obligations – such as an Unfunded Non-Qualified Deferred Compensation Plan that hinders the value somehow. Owners often lean on the advice of their attorneys and other advisors to overcome such things.

#4 – Protecting and driving value

The attorney reviews entity status, conducts fiscal year-end planning meetings with other advisors on the team, and discusses the use of the lowest defensive value for ownership transfers to insiders such as family members and employees.

They play an essential role in the year-end legal audit. If needed, the attorney discusses and creates asset protection tools. They are leaned on to discuss covenants not to compete and non-solicitation agreements with its key employees.

They work towards removing personal guarantees and personal assets as collateral for business debt to protect the value for the business owner. The attorney could also opt to create multiple entities after discussing with the advisory team for liability protection.

To implement Value Drivers, attorneys often advise owners to create different programs such as incentive-based plans to motivate and keep key employees, Non-Qualified Deferred Compensation Plans, Stock Purchase Plans, ISO and non-qualified Stock Option Plans, Equity-Based Plans, Stock Bonus Plans, Buy-Back Agreements, etc.

#5 – Sale to a third party

In the event of the sale of the business to a third party, the attorney conducts the tax analysis necessary for the sale. They play an essential role in the crucial due diligence process at this stage.

Owners lean on them to prepare and review all the necessary documents and lean on them for assistance in negotiating a deal.

#6 – Internal transfers

In the event of the transfer of the business to family members, key employees, or co-owners, attorneys assist by creating written plans to transfer ownership that helps the parties involved prepare for the future and cope with unforeseen events.

They draft important transfer documents such as purchase agreements, employment and buy-back agreements, notes, and security instruments. They also design and draft Buy-Sell Agreements among new owners and create documents providing incentives to key employees not receiving ownership.

#7 – Wealth preservation planning

Owners lean on their attorneys to revises the owner’s estate plan to reflect exit goals. They discuss with the advisory team and incorporate the family business transfer considerations and wishes into the owner’s planning document.

They also create related entities to be partly owned by children as appropriate. They often play an essential role in designing charitable income or estate tax planning techniques and tools.

Closing Thoughts

The attorney and the other advisors provide timely advice and assistance to ensure that the business owner exits the business smoothly and obtains maximum gains. As the exit planning process and the final liquidation event is complex, it is important to have an attorney in the exit planning team who ensures the legal and financial safety of the business owner.

Author Summary

Dan Doran

Dan Doran

Is the Founder of Value Scout, Quantive and the 2019 Exit Planner of the Year. He is a recognized expert and speaks frequently about M&A, valuations, and developing more deliberate value creation strategies.
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