Someone must have the money to purchase my business. In every situation this is a simple but clear absolute. (In addition to making a liar out of himself as soon as he said it, the guy who said “there are absolutely no absolutes” never tried to get money from his business.) Since I have no idea far in advance if an outsider, a family member or an employee will be the best option to take over my company, and since having options open to me when I do exit will enhance my negotiating position, I want to make certain that I keep all options open for as long as I can. If there is even the slightest possibility that I’ll want family to take over or employees to purchase, this is a critical issue, because, generally the lack of capital prevents family and employees from taking over the business without me making a “gift” to them.

There are two kinds of gifts when it comes to business planning:
· Expensive gifts and,
· Very expensive gifts.

An expensive gift is the one that I give because no one has the money to purchase my business at full value. A very expensive gift is the one I give because no one has the money to purchase that also has a gift tax assessed on it. The gift tax rates are the same as the estate tax rates that start at more than 35% of the value of the asset given. While it may not be wrapped in colorful paper and big bow, if I transfer the business for less than what it’s worth, and the transfer is to a family member, it’s considered a taxable gift and tax is due immediately.

In an employee transaction the same lack of dollars may be involved, but because with a non-family member the transaction will generally be considered “arm’s length”, there is seldom gift tax due. This still doesn’t change the fact that I still get less money for the business than it’s worth.

Now obviously no one wants to work a lifetime building a business only to give it away and be required to pay gift tax to boot. But this is what happens when others aren’t prepared to make an investment in the business. We can prepare for this, as long as we start now, and in many cases we can get the government to provide a subsidy for doing so.

I have several important objectives as I run my business. I want to attract the best talent that I can to come and work for my company. After I hire them, invest in them, train them and get them to where they are useful, I want them to stay with my company. I want to exit my company when I’m ready (which won’t be for a long time) and get a fair price for my efforts and the business we’ve built. These three objectives can be simultaneously addressed at a low cost where everyone benefits.

First of all, the company should have some kind of future savings or retirement plan. This can mean a plan where employees contribute only their own money, this can be a plan where only the company contributes money, or it can be a combination of both. But regardless of who puts money in, the contributions are tax-deductible. Knowledgeable, responsible, hard working employees (the best kind) almost always want some kind of plan such as this. If my company does not have one, it will be more difficult to get them to come and work for me. As we said in a previous piece, don’t let some retirement plan salesman tell you what plan and provisions you must have. Take your objectives and budget and build a plan around them. (If you can’t find someone to help you do this, call me and I’ll help you.)

Secondly, for my most important employees I develop some kind of personal incentive program. I identify my most important performance objectives then build an incentive plan around them. Now I can pay more wages (cash) or I can give ownership (stock) to these employees. Problem here is that I increase my own costs, payroll taxes, and/or headaches when I use these two types of compensation.

There are six or seven other types of incentives I can use, some of which will allow me to defer payment until the time of employee retirement. In some of the plans if my employee doesn’t meet the incentive requirements or is terminated early, I can recoup my investment without having to pay that person who didn’t fulfill their responsibilities and objectives. In other words, my employee receives the incentive pay only if he produces benefit for my company. If he doesn’t, I get my money back.

Let’s suppose that I didn’t do anything else other than implement a low cost retirement plan and do a cost recovery incentive plan for my key employees. After several years accounts are building up with capital in them. Now if an employee or group of employees had a desire to buy my business, they have at least some amount of money that can be used as a down payment on a loan, that could be converted to an ESOP to buy my stock, or that could simply buy my business outright. In this plan, everyone who meaningfully contributes to the success of my company benefits meaningfully. “Those that don’t, don’t.”

This is one example of how I plan for my own exit, at a low cost, and do it well in advance of when I want to leave. I benefit in the short term from attracting good employees, I reduce my employment and turnover costs in the mid-term by retaining the key people that I have, and I increase the opportunities to exit successfully in the long term because my employees at least have some money that can be used to buy me out in a variety of ways.