Key Takeaways:

  • Set Clear Goals: Define your long-term exit and post-sale objectives.
  • Assess Business Value: Consult valuation professionals to understand market worth.
  • Identify Potential Buyers: Target strategic buyers, private equity, or internal candidates.
  • Develop a Transition Plan: Outline steps and timelines for ownership transfer.
  • Minimize Tax Liability: Use proactive tax planning to maximize sale proceeds.

The Importance of Exit Planning for Business Owners

Are you planning to sell your business? A comprehensive business exit strategy is crucial for maximizing your outcome. Exit planning should be top of mind for all successful business owners, but it’s often overlooked by many entrepreneurs.

Even if you don’t currently have plans to sell your business, the exit planning process should begin sooner rather than later. Starting early allows you to work with your management team to maximize your business’s value. Compare that to reaching retirement age, deciding you want to sell, and then being forced to take whatever deal you can find. The difference could be millions of dollars.

Every business owner will eventually exit their ownership position. Proactive steps, such as conducting due diligence, developing a contingency plan, and incorporating estate planning to manage estate taxes, can make a huge difference in the outcome. Let’s explore common exit strategies and provide practical tips for business owners to start preparing today for a successful business exit.

What is Exit Planning?

An exit plan is a strategy that an owner has to relinquish their ownership position in their business. This can be done in several ways, from selling to a third party, transferring ownership to family members and/or employees, or liquidating the assets of the business.

Exit planning can also be referred to as succession planning. Whatever approach you decide to take to exiting your own business, a careful, considered approach with plenty of planning is key to ensuring a successful outcome.

Why is Exit Planning Important?

For most business owners, the sale of their business is the biggest transaction of their lives. If you’ve been successful, the sale of your business will significantly outweigh the sale of any house or vehicle, potentially setting your family up for generations to come. Effectively planning for your exit doesn’t just maximize the value you’ll be able to realize when selling your business – it also minimizes the potential taxes you’ll be liable for.

Beyond these financial elements, many business owners have an emotional attachment to their business. You likely have employees who have worked for you for years that you want to see looked after. You might have years-long relationships with customers and care deeply about how they will be supported on an ongoing basis.

Ensuring a smooth transition for all stakeholders involved, while maximizing the financial rewards you receive for your years of hard work, demands a comprehensive exit planning process.

5 Steps to a Successful Exit

5 Key Steps to Effective Exit Planning for Business Owners

Here are some key steps to consider when creating an exit plan for your business:

1. Set Clear Goals

Before creating an exit plan, it’s important to define your long-term goals. Decide whether you want to sell for the highest price, transfer to family, or sell to key employees. Consider your post-sale plans, such as starting a new venture or retiring, and assess the cash needed to support your desired lifestyle. This clarity will guide your exit strategy.

2. Assess the Value of Your Business

Your business’s worth is determined by the market. Consult with valuation professionals to understand its market value and identify improvement areas. Enhancing aspects like revenue diversity or bookkeeping can improve your business valuation, ensuring you get the best possible return.

3. Identify Potential Buyers

Identify potential buyers based on your business’s nature and your goals. This might include strategic buyers, private equity firms, or internal candidates like employees or family members. Advisors with industry connections can help find the right buyers, leveraging their networks for the best match.

4. Develop a Transition Plan

After finding a buyer, develop a detailed transition plan. This involves setting a timeline and planning knowledge transfer to ensure a smooth handover. You may need to stay on temporarily to maintain continuity, often tied to performance milestones in the sale agreement.

5. Minimize Tax Liability

The sale of your business can result in a significant tax burden. Work with a tax professional to structure the deal using proactive tax planning for maximum tax efficiency. Utilize tax breaks and strategies to minimize your tax liability, ensuring you retain as much of the sale proceeds as possible.

Every situation is unique, which is why it’s so important you find an experienced tax advisor you can trust.

Ways to Exit a Business

When it comes to exiting a business, consider these five strategies:

1. Family Succession

  • Pros: Groom successors over time and choose the person to continue your business.
  • Cons: Family relationships must withstand the stress of business ownership.

2. Sell to Another Business

  • Pros: Potential for growth and access to new markets through merging or acquisition.
  • Cons: Loss of control and potential clashes in company culture.

3. Management or Employee Buyout:

  • Pros: Ensures continuity and provides a smoother transition.
  • Cons: Finding the right buyers and negotiating terms can be challenging.

4. Initial Public Offering (IPO):

  • Pros: Access to capital and increased visibility.
  • Cons: Regulatory requirements and loss of privacy.

5. Liquidation:

  • Pros: Quick exit, particularly if the business is struggling.
  • Cons: No ongoing business legacy.

Remember, there isn’t a one-size-fits-all solution for exiting your business. The best option depends on your specific situation and goals. Consider factors such as financial implications, continuity, and your personal vision for the future of your business.

Start Planning for the Sale of Your Business with LBMC

Exiting planning is an important topic for all business owners – even those that have no plans to sell anytime soon. By planning ahead, you can achieve your financial goals and leave a lasting legacy for your employees and customers.

At LBMC, we’ve been advising entrepreneurs and family business owners across Tennessee, Kentucky, and Indiana for over 40 years. Our team has extensive experience in exit planning processes and is dedicated to helping you achieve a life-changing exit for yourself and your family.

With a comprehensive range of advisory, tax, and business valuation services, LBMC is well-equipped to guide you through every step of the exit planning process.

Are you ready to get started? Fill out our contact form today to connect with an advisor and begin planning your successful business exit.