How Does a Business Owner Create an Exit Strategy?

You spend a lifetime building your business, so it’s crucial to have a game plan when it’s time to leave. Being prepared will help optimize the transition from a financial and tax perspective.

Letting go of a business is not easy. Whether the exit involves selling the business, retiring, or results from unexpected events, having an estate and succession plan is essential.

When Should You Plan?

It’s best to establish a plan early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Without an estate plan, your business interest may go through probate, which is both public and time-consuming. The business may struggle to recover from asset distribution and the resulting exposure. Additionally, lacking an estate plan means missing opportunities to leverage discount gifting or other tax-reduction strategies.

Key Considerations

When discussing your exit strategy with an estate planning attorney, address these questions:

Exit Strategy Options: Will you sell the business, pursue an acquisition or merger, have a family member take over, or sell to key employees?

Financial Goals: How much money do you need and want at exit? Do you prefer a stream of income or a lump sum?

Charitable Giving: Do you have a charitable giving plan to gain tax advantages and support meaningful organizations? Structuring gifts far in advance avoids reduced fair market value assessments.

Family Succession: Transferring to family members creates different planning opportunities than selling externally. If some family members aren’t involved in the business, will they receive a share? Should you equalize inheritances using trusts or other mechanisms?

Tax Planning: Work with an experienced estate planning attorney to create a succession plan with a tax model. This is often overlooked but critical for managing cash flow and maximizing tax benefits.

Gift Strategy: Decide whether you want to make gifts using business interests or sales proceeds early on, and determine if these go to family members or charities. Earlier planning maximizes income and estate tax benefits.

Retirement Planning: Clarify your retirement needs and goals. Many business owners miscalculate expected investment income from after-tax sale proceeds. Ensure the structure supports your desired retirement lifestyle.

It’s never too late to plan for an exit strategy, and the earlier you begin planning, the higher your likelihood of achieving a successful transition.

If you or a loved one needs assistance with elder law or estate planning issues, do not hesitate to contact us. We are here to help.