One fact every entrepreneur must face is that one day, we won’t be running the business we’ve built and nourished for decades.

Some entrepreneurs realize this early on, and plan ahead for that day.

Ideally, we start preparing for our exit the day we open as start-ups. But most entrepreneurs, of course, get too caught up in day-to-day operations, not to mention all the rest of life (family, friends, hobbies, leisure activities, etc.), to plan as soon as they might.

Here are some reasons, though, to plan your exit strategy and start getting your business ready for sale or transfer at least 5 years before any such transaction is actually finalized.

It Starts With

Working with your fractional CFO and an attorney, both well-versed in exit planning, you’ll need to consider the following―and will very likely need to begin adjusting:

• The fair market value of your business. You and your advisors should benchmark your enterprise against similar concerns and take steps to maximize that value.
• Your entity structure. Are you an LLC, an S Corporation, a C Corporation? Have your advisors draw up a hypothetical sale, with tax consequences mapped out, to determine whether a change in entity structure makes sense? Any change in structure from a C Corporation to an S Corporation should be finalized 5 years before any sale to obtain the attendant tax benefits―don’t convert closer to your sale, or you will trigger the “built-in-gains” (BIG) tax liability.
• The tax structure of your exit plan. Whether you plan to sell to an outside buyer, existing partners, key employees, or hand the reins to one or more members of your family, you and your advisor team should optimize this structure, while leaving room for negotiations with your eventual successor.
• Aligning exit plans with your estate and gifting plans, to ensure your goals are consistently furthered.
• Prepare for buy-side due diligence. Your transaction will go much more smoothly if you’ve prepared for a buyer’s scrutiny.

Minimizing Tax Liabilities

We’ve mentioned the importance of entity structure, but there are other strategies you can use to reduce the tax consequences of your business exit.

• Installment sales. Such sales can both spread the tax liabilities and provide you with additional income for a specified period of years.
• Employee Stock Ownership Plans (ESOPS). If you plan to transfer ownership (full or partial) to key employees, an ESOP can also spread tax liabilities over time and offer additional tax and business incentives.
• Leveraging your Qualified Small Business Stock (QSBS) ownership position. If your business is a domestic C Corporation, and your stock ownership meets certain requirements, I.R.S. Code Section 1202 allows significant tax benefits on your gains―potentially, exclusion of up to $10 million, or 10x your basis in the stock, whichever is greater, from your taxable income.
• Pre-Sale Gifting. Giving your stock to an irrevocable family-oriented or charitable-remainder trust well ahead of a sale can help by freezing your stock’s asset value, moving appreciable value out of your taxable estate.

Your Business People

Your exit will have an impact on:

• Your management
• Your team
• Your clients
• Your suppliers

How you include them in your plans, and how and when you communicate those plans, can affect how your business runs and thrives when you’ve left, or handed over at least partial control.

Consider carefully. Giving too much information, or giving it too early, can adversely affect your plans, At the same time, you want to minimize any friction, either pre- or post-sale; you don’t want your people feeling excluded or blindsided.

Family Matters

Exiting your business also affects your family.

You will want to hold a family meeting (if not, hold it anyway) to discuss your plans. Again, this is about keeping communication flowing and minimizing friction.

If any of your children are hoping to step into a leadership role at your business, either make sure they get started now, or gently inform them you’re making other plans.

You may find a family member offering an idea you like which hasn’t been floated previously. At least take any such ideas to your advisors for evaluation.

But do always take advice when planning! You’ll need a raft of trusted advisors when you actually undertake a sale or transfer of your business, so get in the habit now!

Consult your trusted business advisor(s). In this context, we recommend your fractional CFO or other trusted financial and tax advisor, as well as your business and estate attorney(s).

Rigby Financial Group has helped clients prepare for, negotiate, finalize, and follow up on sales of their businesses to best advantage, We have worked closely with business and estate attorneys in these and other instances, and if you don’t yet have one, we can offer guidance and, if you like, referrals.

Bottom line, start planning! It’s never too early. But it’s never too late, either, for an exit plan to afford you significant benefits.

If you are considering a potential sale of your business within the next decade, please don’t hesitate to call upon us. We can help you through every step – it’s what we are here for.

Please click here to email us directly. Let us know how we can help you.

Until next time –

Peace,

Eric

See also:

When Should You Start Planning to Exit Your Business?

Top Tips to Consider When Selling Your Business

Are You Ready to Sell Your Closely-Held Business?

Getting Your Closely Held Business Ready for Sale

Is Your Business Doing Enough – Or Any – Succession Planning?