If you had the gumption to start your own company, muster that same courage to create a business exit strategy.
In 2016, my brother Michael, a CPA in the Denver area, talked to me about this. It was after 11:00 pm on the last day to file taxes that April. Like most tax prepares I know, he had burned the midnight oil for weeks before, hammering out tax returns He was self-employed and said several times during our call that he really needed an exit strategy. It still does.
Later that night, he had a near-fatal heart event and ended up in the hospital in an induced coma for three weeks. He, fortunately, regained consciousness and, after extensive rehabilitation, regained his ability to walk, talk and eventually go home and resume his normal activities.
His “I need an exit strategy” comment lingered in my brain for all that rehabilitation time.
We are very blessed by Michael’s complete recovery. His expressed desire for a plan should resonate with anyone who owns a business.
Letting go of a business is not easy, says a recent article titled “Estate Planning Strategies for Business Owners Planning an Exit” from CEOWorld Magazine. Where the exit is to sell the business or retire, or the result of unexpected events, it’s crucial to have an estate and succession plan.
When should you establish a plan? It should be early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Not having an estate plan could mean your interest in the business goes through probate, which is both public and time-consuming. The business may never recover from the distribution of assets and the exposure. No estate plan also means missed changes to leverage discount gifting or other tax-reduction strategies.
Consider the following when talking with your estate planning attorney:
What is the business exit strategy—to sell, be acquired or merged, have a family member take over, or sell to employees or another successor?
How much money do you need and want at the exit? Do you want to create a stream of income or a lump sum?
Do you have a charitable giving plan to reap tax advantages and support an organization with meaning to you? Structuring a gift far in advance avoids using a reduced fair market value and having it deemed a cash gift.
Transferring the business to family members instead of selling to outside parties creates many different planning opportunities. With family members, emotions come into play, even though this is not always productive. If some offspring are not involved in the business, will they receive a share of the business? Do you want to equalize your inheritance? Assets can be divided by the use of trusts, for example.
You’ll want to work with an estate planning attorney with experience in creating a business exit strategy with a tax model. This is often overlooked in succession planning and can cause significant cash flow management issues and lost tax benefits.
Determine if you want to make gifts using business interests or sales proceeds early on and whether these gifts will go to family members or charities. The earlier the planning occurs, the more you can maximize the income and estate tax benefits.
Clarify your own retirement needs and goals. Business owners often fail to correctly calculate the expected investment income on after-tax proceeds from the sale of the business. Will it be sustainable enough for the lifestyle you want in retirement? If not, is there a way to structure the sale of the business to achieve your financial goal?
It’s never too late to plan your business exit strategy; the earlier the planning, the higher the likelihood of a successful transition.
Reference: CEOWorld Magazine (Aug. 16, 2022) “Estate Planning Strategies for Business Owners Planning an Exit”
