Running a successful business takes a considerable amount of time and effort, and it can leave business owners without much of an opportunity to think about an eventual exit. However, a well-crafted exit strategy can make for a smooth sale or handover of the business, and it can also help ensure that you move forward to the next chapter in your life with the financial security you’ve worked so hard to build.
In this article, we will discuss the 5 steps that can help you exit your business in style.
Step #1: Have a plan for living your dream
The first step is to define what exactly you want life to look like after you sell your business, such as what you will do, who you will spend time with, and how your life will look different than it does today.
Once you’ve established what you want your life to look like post-exit, you can begin thinking strategically about the future. Start by asking yourself the following questions:
Asking yourself these questions is the very first step towards exiting your business. You need to have well-defined goals and a strategy to ensure your financial security post-exit; just as importantly, you need to be sure that selling your business fulfills both these needs. If you don’t, then you don’t yet have a true exit plan.
Step #2: Build a team
Once you’ve answered those key questions listed above, a great next step is to assemble a team of professionals who can help guide you through the sales process. At a minimum, this team should include an accountant, a business or M&A consultant, an estate planner, a transactional business attorney, and a wealth manager.
All of these professionals play distinct roles, but, like any good team, they should work well together and be open to collaboration with other members of your team. Finding the right people can take time, so it’s always advisable to start building this team well in advance of an eventual transaction.
Step #3: Go from “Hands-On/Head Down” to “Hands-Off/Head Up”
Running a business is often “hands-on/head down”: You’re involved in all the key areas of day-to-day operations, and your focus is almost entirely on making sure your business is running smoothly.
Preparing to exit a business, on the other hand, may require a more “hands-off/head up” approach, which means stepping back and looking at your business from a new perspective. This approach starts with changing your role and becoming a “spoke” in your business operations, rather than the “hub.” Up to this point, you’ve likely handled a wide range of responsibilities. But once you exit the business, those responsibilities will need to be handled by someone else, so it makes sense to start that transition as soon as possible.
The less your business relies on one person, the better: buyers want a business that can continue to run smoothly once you exit your role. As an added benefit, a more hands-off approach gives you more time to focus on things that may improve the transferable value of your business.
Step #4: Consider your options & plan your strategy
At this stage, you will rely heavily upon your accountant, M&A consultant, and transactional business attorney because there are a variety of ways you can sell your business and a variety of tax implications. The most common potential buyers that we have seen fall into one of four groups: insiders, third parties, children, and Employee Stock Option Plans, or ESOPs.
The first two groups are more self-explanatory; insiders are current employees of the business, and third parties can be competitors, larger companies in your field, or companies outside your field that wish to expand their operations.
For family-owned businesses, children can be potential buyers as well—and as noted above, this can present opportunities from a tax and estate planning perspective. If your children are interested in taking over the family business, you may consider giving them voting or non-voting shares ahead of the transaction date.
Gifting shares helps reduce the cash outlay your children would need to purchase the business, and it’s a tax-friendly way to preemptively pass down wealth to future generations of your family. Currently, the lifetime gift exemption is $12.92 million per individual[1], but there is a sunset provision on the current limit in 2025; in other words, unless Congress decides to extend the exemption, the lifetime limit will likely be cut in half in 2026, which could significantly limit the amount of shares you are able to give to your children.
If you want to leave the company in the hands of the people who helped make it a success, but they can’t afford the cost outright, selling to an ESOP (Employee Stock Ownership Plan) may be an option as well.
The sale of your business can happen outright, or it can happen as an installment sale. But no matter who buys your business or how the sale unfolds, it’s important to understand the tax implications of any strategy. This is where your accountant and M&A consultant can help define the best path forward.
Step #5: Have a post-sale strategy for your money
Lastly, it’s critical to have a strategy to protect the wealth created from the transaction. There are a variety of ways you can use the sale proceeds to fund your post-sale life, and your wealth manager can help you create the right investment strategy for your needs, risk tolerance, and time horizon.
Managing your tax burden is also a crucial part of your post-sale financial plan. The sale of your business will likely mean significant realized gains—and a significant tax hit along with it. Your wealth manager can also help you consider strategies that may reduce that tax hit, including daily active tax management strategies and tax-loss harvesting.
Finally, philanthropically-inclined business owners can also use strategic gifting to help those in need and reduce their tax burden at the same time. This can be achieved in a number of ways, including through direct gifts, establishing a donor-advised fund (DAF), or through a charitable lead/remainder trust with the organization of your choice as the beneficiary.
Closing Thoughts
You worked hard to build your business. By taking the steps outlined above, you can help ensure that when the time comes to step away, your hard work will be rewarded in the best way possible: with financial security for you and your loved ones.
If you’re considering exiting your business and would like to discuss your strategy, we invite you to connect with our team.
[1] IRS, What’s New – Estate & Gift Tax. (Link)
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