Planning for Closely Held Business Owners - 11 Benefits and Risks of Business Exit Structures Flashcards
what are business exit structures?
a plan that allows a business owner, investor or trader to sell their ownership in a company. Types of exit strategies include liquidation, acquihire and bankruptcy. Exit strategies outline actions to maximize profits, minimize losses and ensure the success of their companies upon their departures.
What are some examples of business exit structures?
Merger and acquisition exit strategy (M&A deals)
Selling your stake to a partner or investor.
Family succession.
Acquihires.
Management and employee buyouts (MBO)
Initial Public Offering (IPO)
Liquidation.
Bankruptcy.
What are the benefits of private and public sales?
Private: Getting cash increases personal liquidity and diversifies one’s assets, which in turn reduces stress and risk! Partial sales additionally reduce personal financial risk by often removing personal guarantees on company debt.
Public: To increase liquidity for a company’s stock, which may allow owners and employees to sell stock more easily. To acquire other businesses with the public company’s stock. To attract and compensate employees with public company stock and stock-options. To create publicity, brand awareness, or prestige for a company.
What are the risks of private and public sales?
Private: Possible need to finance a portion of the transaction, which can leave some of your assets at risk. If you remain involved with your business after a sale, however, new owners face less risk and may be willing to finance more of the sale price on their own
Public: increased regulatory requirements, loss of privacy and control, and higher costs associated with being a public company.
What are the benefits of SCINs?
In simple terms, a SCIN has all the attributes and benefits connected with an installment sale, with an extra benefit that the note and any remaining balance owed are cancelled upon the death of the seller.
The main objectives surrounding a SCIN are to avoid any gift tax on the transfer and to exclude any unpaid balance on the note from the seller’s estate, after they die. This means the seller’s taxes will be reduced while at the same time more money will be available for their beneficiaries.
What are the risks of SCINs?
SCINs present the opposite of mortality risk: The tax benefits are lost if you live longer than expected. If you survive the note’s term, the buyers will have paid a premium for the assets, and your estate may end up larger rather than smaller than before.
What are the benefits of recapitalization?
Recapitalization is the restructuring of a company’s debt and equity ratio. The purpose of recapitalization is to stabilize a company’s capital structure. Some of the reasons a company may consider recapitalization include a drop in its share price, to defend against a hostile takeover, or bankruptcy.
What are the risks for recapitalization?
tax consequences, lender issues, and liability.
What are the benefits for seller and third-party financing?
expedites the sales process as it eliminates the need for third-party lenders, banks, and extensive paperwork. The reduced red tape allows for a smoother transaction, making the property available to the buyer without the typical waiting period, ultimately resulting in faster closings.
What are the risks for seller and third-party financing?
Risk of Unfavorable Loan Terms From the Seller
Sellers who are extending their own financing (also called “taking back a mortgage”) often charge a higher interest rate than institutional lenders, because of the increased level of risk that the buyer will default (fail to pay, or otherwise violate the mortgage terms).
What are the benefits of private annuities?
Benefits of private annuities include: The property is removed from the seller’s taxable estate. If the promised annuity payments equal the value of the property, the seller avoids gift tax. If the annuitant dies before the annuity payments equal the value of the property, any remaining untaxed gain will escape tax.
What are the risks of private annuities?
counterparty risk, meaning that the obligor may not fulfill their obligations and default on payments
What are the bet-to-die strategies designed to freeze the value of a business?
Gifting
Traditional Notes
SCINS
Private Annuity
What happens under a private annuity?
Business is sold and payment is made via an annuity. If the annuity is actuarily correct there is no gift or estate tax inclusion. Any shortfall is a gift.
What condition must exist to make a private annuity a viable option given IRS Regs tried to put a chilling effect on private annuities by taxing a gain upon the establishment of the annuity?
The annuitant has a high basis in the business- such as a stepped-up basis received by a surviving spouse.
