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Legal Landmines – Feeling Trapped in your Business?

Legal Landmines – Feeling Trapped in your Business?

Early Exit Planning is the Key

Preparing for Departure. It’s inevitable – you will leave your business. To avoid being trapped in your business, early exit planning allows you to leave by attracting buyers and improving valuations. While there are various exit scenarios, statistically speaking selling your business is the most viable voluntary exit. Proper planning can maximize business value for sale or for your family.

Protect Assets and Retain Key Employees. Protecting the business assets (with employee intellectual property assignments, confidentiality and noncompetition agreements) and incentivizing key employees to transfer increases the value of a business. “Golden handcuff” bonus arrangements can boost business valuations by:

  • tying employee bonuses to performance benchmarks impacting value (such as EBITDA in most cases); and
  • vesting employee bonus awards over time (economically incentivizing employees to continue with a purchaser).

Time Improves Outcomes. There is a reason that most professionals recommend exit planning start at least three years in advance. In the chart below, the left axis and golden columns depict annual growth in business value (assuming a 6X multiple of EBITDA growing at 5% per year from $100,000). The right axis and blue line reflect the unvested employee bonuses forfeitable on quitting (assuming employee bonuses equal 15% of EBITDA with awards paid over five years). These results improve with the length of time that the bonus arrangements have been in place.

May 6, 2019