Exam (elaborations)
CEPA - 12. EXIT OPTION ANALYSIS
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CEPA - 12. EXIT OPTION ANALYSIS
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CEPA - 12. EXIT OPTION ANALYSISWHY SHOULD CEPA'S CARE ABOUT ALL THE EXIT OPTIONS? Right Ans - •
Empowering owners with choices
• Differentiates the advisor - qualified & well-trained
• Avoids the appearance or perception of bias toward one or just a few
options
• Helps with "issue spotting"
• Organizes how the inter-disciplinary advisory team is structured
• A broad spectrum of options decreases the transition failure rate without
planning, success rate is 20-30%.
THE TRANSITION-READINESS OPTIONS CALCULUS Right Ans - Readiness
= Options
Options = Higher probability of successful transition
Successful transition = Wealth continuity
FUNDAMENTAL: THREE LEGS OF THE STOOL Right Ans - - PERSONAL
FINANCIAL READINESS
- OPTIMIZE THE VALUE OF THE BUSINESS
- LIFE-AFTER-BUSINESS PLANNING
ONE COMPANY, MANY VALUES depending on ... Right Ans - The kind of exit
options.
ESOP use Right Ans - FMV valuation approach
UNDERSTANDING OWNER MOTIVATIONS AND DESIGN CONSTRAINTS: 3
main motivations to consider when designing exit planning options - what are
driving the motive? Right Ans - - Clarity (without clarity doing is guessing)
- Liquidity
- Legacy
TWO (Main) CATEGORIES FOR PRIVATE OWNERSHIP TRANSITION Right
Ans - - Inside
- Outside
- Hybrid option is also available
, Two general categories for private ownership transition: "Inside" Right
Ans - i) Intergenerational transfer
ii) Management buyout
iii) Sale to existing partners
iv) Sale to employees (ESOP)
Two general categories for private ownership transition: "Outside" Right
Ans - i) Sale to a Strategic third party
ii) Sale to a Financial third party
iii) Recapitalization
iv) Orderly liquidation
INTERGENERATIONAL TRANSFER/SALE Right Ans - Transfer or sale of
equity to a successor generation, usually (but not always) children.
50% of family business owners want to exercise this option - in reality, only
about 30% do so.
Intergenerational Transfer - How does it work? Right Ans - • Sale or a gift,
or a combination. Estate and tax planning may play a significant role
• Exiting family member(s) often finance the transaction themselves
• Equity may be transferred over time in smaller pieces
• Earned equity requirements are sometimes attractive
• Diversified classes of stock can be considered (most flexible in LLC and C-
corporations)
• Family equity and employee ownership/incentives are not mutually
exclusive
Intergenerational Transfer - Why would the owner do it? - Pros Right Ans -
• Legacy preservation
• Wealth preservation and stewardship
• More control over the process and confidentiality protections
• Less operational disruption (can be planned for)
• Aligned motivations (high buyer/seller motivation)
• Emotionally rewarding if it works well over time - transitioning owners are
proud of their children's success
• It could be a "tie breaker" in a balanced gifting strategy if there are multiple
siblings
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