STRATEGIC EXIT PLANNING
Business investing and development opportunities are more often than not viewed
only from the point of beginning as having only one outcome – success. But for that
view, no one would undertake a venture, obviously. However, there always needs to be
an exit strategy in mind and documented as carefully as the entity selection and protective
agreements that assure the lenders a return and the investors their return on risk taken.
The most usual and simple plan is to provide a buy–sell agreement that is formula
based and has the alternative of providing a fixed number for a limited period of time.
Such an agreement provides for the continuity of the business as long as the remaining
owners are willing to continue the enterprise. The pricing of the buy-sell can be respected
by Internal Revenue Service, as to transfer valuation for estate tax purposes provided the
safe harbor provisions of
Code Sec. 2703(a)
Reg § 25.2703-1(a)(1)
. This may be true
even in the intra-family setting if care is taken to establish the bona fide business
relationships of the restrictions and valuation techniques applied. Such agreements must
be crafted to meet the conditions and circumstances of the particular business and the
Such agreements may also be funded by life insurance on the life of the owners.
However, in a corporate setting, it is important to avoid having the proceeds of life
insurance payable to the corporation, since those proceeds could be treated as taxable
income of the corporation. Several techniques are used to avoid this unhappy result.
Charles H. Moses, III