No doubt your business exit will be a complex transaction. Without the proper planning and drafting of the associated legal documents the negative tax, business, and legal consequences may be far-reaching.
A well designed exit strategy starts with your goals and executes your exit plan with the necessary consideration to the business, tax, and legal components of the available strategies.
Caution must be exercised because too many attorneys practice “This is the way we do it” legal advice. Their methods may have adverse tax consequences and impact the amount you pocket from the transaction and on the business’ cash flow. Legal advice must be tailored to fit your specific needs.
Remember, the legal agreements associated with your business exit will not only dictate the tax treatment of the monies paid now and in the future, but will also provide recourse (if any)for exiting owners for any future payments, defaults, promised performance, or business issues or failures. Additionally, the legal agreements must protect you from any unnecessary future liabilities.
Agreements that you should be familiar with include:
- Buy / Sell Agreement
- Shareholder Agreement
- Letter of Intent to Purchase
- Non-compete Agreement
- Finance Agreements
- Purchase or Sale Agreement
You should also be knowledgeable about business entities such as S-Corps, C-Corps, LLCs, and multi-entity structures. The optimal legal structure for your specific situation should be in place prior to your exit.
A very important factor is limiting or eliminating any future liability on your personally after the exit of the business. Unforeseen lawsuits can come back to haunt you later. A properly structured Exit Plan can minimize the chances of this type of litigation.
