Don't Forget to Consider Putting an Exit Plan in Your Start-Up Documents
Breaking up is probably not on the flowchart that shows how your business will be transformed from a dream into a reality. Like newlyweds, new business owners are optimistic. Everyone expects the venture to be rewarding and last forever, or in the business world, at least long enough to be successful.
But life changes, and even if you and partners always see eye to eye and the business finds success, you may find yourself wishing for a way out at some point in the future. If you have a business partner, be sure to include exit terms in your comprehensive business plan, whether you are planning a start-up or acquiring an existing business.
The exit terms appropriate for your business will depend in part on the type of business entity you operate. Partners' options differ from LLC members' options, both of which differ in degrees from shareholder options. Some of the most common exit options for private businesses include:
- Transferring one's ownership interest to a family member. This option is known as family succession.
- Selling one's ownership interest to internal management or employees. This option is known as a management buy out (MBO).
- Selling one's ownership interest to outside management. This option is known as a management buy-in (MBI).
- If ownership is represented by stock, a shareholder can list the shares on the stock exchange. This option is often referred to as flotation.
- Creating a franchise and possibly then selling the franchisor rights.
- Selling one's ownership interest to a third party. This option may be referred to as a ‘trade sale').
- Transferring one's ownership via a merger with another business.
- Closing the business down and winding up operations.
The beginning of your business endeavor is the best time for the owners to decide which exit options are most attractive and which are unacceptable. As time goes by, other options may emerge that can be put to a vote according to the business's governing documents.
In the future, if the time comes for you to make your exit from the business, be sure to consult with an experienced Texas business law attorney to help you consider all of your options. Also plan to talk with your accountant about the potential tax consequences of each option. The better you plan for a possible exit now, the more options you can expect to have in the future.
If you are considering adding exit terms to your business plan, partnership agreement, or operating agreement, consult an experienced Bryan-College Station, Texas business law attorney who can provide assistance and answer your questions. Call the Peterson Law Group to make an appointment at 979-703-7014 or 936-337-4681 or fill out our online contact form.
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