The purpose of Exit Planning is for owners to achieve their financial and lifestyle objectives after they leave their business. One of the fundamental objectives that needs to be decided early in the Exit Planning Process is selecting a successor. Trends have indicated that the majority of owners of smaller-sized businesses prefer to transfer the business to other family members,
an employee or a co-owner. Only a small percent of these owners want to sell to an outside third party. Unfortunately for owners, the people they first identify as their successors often do not end up as the ultimate owners. Much effort is wasted focusing on the wrong successor target or, worse yet, when owners wrongly assume a child or employee wants to own the company they typically don’t take into account alternative plans.
Option One: Transfer of Ownership to Children If your clients are typical business owners, there is a 50 percent chance that they will want to transfer the business to their children. If they are a typical owner; however, there is a substantial possibility that they will end up transferring the business to someone else because of the difficulties associated with this type of transition. Therefore, it is in the best interest of owners and their advisors to realize the difficulty of this transaction, as well as prepare the business for the possibility that it will be conveyed to
another type of buyer.

Fulfills personal goals of keeping the business and family together.
Provides financial well-being for younger family members unable to earn comparable income from outside employment.
Allows owners to stay active in the business with their children.
Allows owners to control their departure date.
Enables owners to fix value by starting with the question, "How much do I need or want?" rather than being told, "This is how much I am willing to give you." This is especially useful in
situations in which the business is worth less than the amount needed to live on – if the business were sold to a third party.
When owners keep the business in the family, they can sell for what they need to live on even if the business value does not justify that sum of money.
Great potential exists to increase family friction, discord and the feeling of unequal treatment among siblings. The normal objective of treating all children equally is difficult to achieve because one child will probably run or own the business at the perceived expense of the others.
Financial security is normally diminished, not enhanced; although with careful planning and implementation, financial security can often be achieved while transferring the business to the children.
Because family is involved, the owner’s control may be weakened. The owner can lose effective control even though he or she still has voting control – due, of course, to the vagaries of family dynamics.
The real risk of transferring the business – because of family ties – to someone who can’t or won’t run it properly, threatens the owner’s financial security and the existence of the business.
Many of the disadvantages can be minimized or avoided through proper planning, but it is important to be knowledgeable of both the advantages and disadvantages associated with the transfer of ownership to children when choosing a successor.

Option Three: Sale to Third PartyThe market has indicated that 20 percent of businesses are for saleto a third party, but only one out of four actually sells. Forbusinesses above $10 million per year; however, the odds improve to50 percent.1 In a retirement situation, a sale to a third party too often becomes a bargain sale – most often the only alternative to liquidation. This option becomes necessary in many situations because owners fail to create a market for their stock through a saleto family members, co-owners or employees. The following are advantages to selling a business to a third party, as well the disadvantages associated with this type of exit plan.
If the business is properly prepared for sale, the owner canget cashed out. Many owners don’t realize this. Unless thecompany is truly a "Mom and Pop" business, owners should getthe majority of their money from the business at closing. Therefore, the fundamental advantage of the third-party saleis receiving immediate cash. This ensures that owners attain their fundamental objective of financial security and, perhaps, avoid risk as well.
A second primary objective discussed earlier – treating all children equally – also is easier to achieve because the ownercan eventually just divide the money among the children on an equal basis without having to worry about who is going to run the business, etc.
Often an unanticipated advantage in selling to a third party is the ability to possibly receive substantially more cash thanfirst anticipated because the market is "hot."Construction Law Blog: Contractor's M&A Corner Page 6 of 9 1/30/2007
Regardless of what the buyer says, the personality andculture of the owner’s business will undergo a radical change. The buyer would not buy the business unless convinced that the company can be improved through change. Maintaining the culture of the business is normally best achieved by selling to someone other than an outside third party.
If the owner does not receive the bulk of the purchase price in cash at closing, the owner’s risk is often substantial. The best way to avoid this risk is to structure a deal in which the owner receives all of the money he or she will need at closing so that anything else is "gravy." Through proper planning, advisors can typically help owners minimize the disadvantages associated with a sale to a third party and leverage the advantages associated with this type of exit path.

For information regarding your Construction Law Blog: Contractor's M&A Corner Page 7 of 9