I invited John Brown, a Colorado native who is the leading authority in North America on exit planning for business owners, to make two presentations in Lancaster on February 5, 2014 before a select group of ten business owners and five professional advisors.
Brown’s presentations focused on the planning process for sales to “insiders” (key employees and family members) as well as sales to “outsiders” (private equity groups, and strategic buyers such as larger competitors in the same industry). According to Brown, the financial environment for business sales is improving – currently there is in excess of $1 trillion dollars in private equity funds looking to acquire closely-held business. However, as baby boomer business owners retire, there are a large number of businesses for sale and buyers are very picky – private equity groups in particular are looking to buy businesses that are “best in class” in their industry.
Brown also discussed the “headwinds” facing business owners wanting to exit. Economic stagnation is making it more difficult to grow businesses. From 1975 – 2000, U.S. Gross Domestic Product (GDP) grew at a rate of greater than 5% per year compared to the last thirteen years which saw GDP growth of 1.6% annually. Also, investment returns have been greatly reduced. Currently business owners who sell their business can expect long-term rates of return of 4% – 5% on the sale proceeds compared to returns of 6% – 10% in earlier periods. Finally, tax rates have increased substantially meaning that business owners get to keep less of the sale proceeds.
Brown cited the results of a survey conducted by the Business Enterprise Institute of over 700 business owners who had exited successfully which found that about 29% sold to third-parties, 24% transferred businesses to their families and 41% sold to key employees (including ESOPs) and co-owners, with the remaining 6% finding other exit paths. Another BEI survey showed that the major factor that keeps business owners from starting the planning process is a lack of a sense of urgency.
Since sales to insiders (children, co-owners, and key employees) constitute about 2/3 of all transfers, Brown focused his discussion on planning techniques for these transactions. These transactions typically occur over a period of years and Brown emphasized the importance of business owners retaining legal control of the business until receiving final payment, and he discussed several strategies for accomplishing this.
About John Brown: John Brown was an attorney in Denver, Colorado for nearly thirty years specializing in estate planning for business owners. He became increasingly involved in business planning for his clients and especially exit planning. After leaving his law practice, John founded the Business Enterprise Institute, Inc. (BEI), a company dedicated to providing exit planning information and education to America’s business owners. BEI also provides in-depth education and training to attorneys, CPAs, consultants, financial planners, transaction intermediaries, and insurance advisors so that they can help business owners plan to exit from their businesses. In 1997 Brown published “How to Run Your Business So You Can Leave it in Style” a comprehensive “how-to” manual on exit planning which has become the most widely read book on its subject. In 2009, John published “Cash Out, Move On”, a guide for business owners who want to sell their businesses to third parties. For further information about Brown, BEI, or exit planning, including a copy of Brown’s recent presentation please contact me.