By the lawyers of Virginia Estate Plans, PLC
The exit strategy of many business owners is to sell at the right moment for top dollar after working around the clock to grow the business. You may plan to sell in 15 years, but the unexpected may escalate that time frame to right now. For example, Bill had a thriving equipment and party rental business. One day, a man stopped by and asked if Bill was interested in selling. “No,” Bill laughed, “not unless you make me an offer I can’t refuse.”
That’s exactly what happened. Bill suddenly found himself a man of leisure. Bill’s is a happy-ending story. Eric’s story, on the other hand, is not. In his case, a diagnosis of multiple sclerosis forced an earlier-than-planned sale.
Since you don’t know what the future holds, your business must always be in “sellable” condition. That includes, among other things:
- Up to date and accurate financial and business records.
- Compliance with all local, state and federal regulations.
- A well-trained management team that can function without you.
- Documentation of value, typically a comprehensive appraisal.
In most forced sale situations, time is critical. The longer it takes, the less valuable the business. Therefore, your attorney should make certain that you have consistent and transferable title to stock (or other evidence of ownership), company real estate and business assets. Your estate planning documents must give your fiduciary (agent under power of attorney, executor and/or trustee) authority to conduct and sell the business. Without properly drafted documents, such authority must be obtained by a judge in a conservatorship or probate proceeding. That takes time, is cumbersome, may limit flexibility and is expensive. With properly drafted documents, the transfer of control from you to your fiduciary can be quick and seamless, minimizing the potential loss in value that a major disruption in control and loss of time could cause.
If an unplanned sale is forced by the owner’s death, estate tax payments (if required) are due nine months after death. Since it may be impossible to complete a sale in that short time, having the liquidity to pay the tax is critical. In an upcoming article, we’ll discuss how to provide that liquidity on a tax-free basis.
A major concern is that the IRS values your business higher than the ultimate sales price and your heirs pay more tax than necessary. That’s why it is critical that (1) you do everything within your ability to preserve the value of the business in the event of your sudden exit, (2) you keep the business appraisal current, and (3) that the appraised value is both reasonable and based on credible data. With such an appraisal, it is likely that the IRS will accept that value and it is more likely that the sales price will come close.
In short, the time to start preparing to sell your business is the moment you open its doors, even if you don’t plan to sell it for many years to come.
The lawyers of Virginia Estate Plans focus exclusively on estate, tax, and business succession planning and have more than a century of combined experience in these fields. For more information please contact Shela Dean at 804.565.2300.