Business Exit Planning: Where to Start?
All business owners eventually reach a point where it becomes time to begin preparing themselves, and their wealth, for the sale of their business.
Selling your business is the culmination of years of hard work and sacrifice. While it’s natural to feel a little trepidation over this major life change, having an exit plan in place can give you the confidence and freedom to enjoy whatever comes next in life.
A holistic exit plan is essential to addressing many of the key questions you’ll face post-transaction.
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- What are your ongoing income needs post-exit?
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- From where will you source your income?
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- What is your strategy for preserving and growing your sale proceeds?
Beyond these financial considerations, a holistic exit plan should also address your aspirations for family wealth and legacy.
Get Your Estate in Order
Pre-transfer planning should be done in coordination with your comprehensive estate plan. Among the key components to consider is trust planning. Trust planning offers a number of benefits including:
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- Ensuring wealth gets distributed according to your intentions
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- Protecting your heirs’ inheritance from unforeseen circumstances
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- Providing an independent trustee to help manage assets
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- Avoiding transfer tax on appreciating net-worth post-sale
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- Minimizing taxes
If you already have a trust in place, you may want to revisit your trustee designation. Since your wealth is likely to be substantially higher than when you first established the trust, you may want to consider whether the trustee you have appointed is appropriate for managing a larger amount of money.
Although the recent tax law change doubled the federal estate tax exclusion limits, using trusts for effective tax planning is still recommended because the current exclusion limits are scheduled to expire at the end of 2025 – or sooner if a different political party occupies Congress and the White House.
Intentionally Use Your Money
According to Dr. Richard Orlando, Founder and CEO of Legacy Capitals LLC “If money is properly understood and used to serve our goals and intended legacies, then we will be happier.”
If we misunderstand the role of money in our lives, it will lead to unhappiness and ultimately despair.”
Often neglected in the flurry of legal documents and issues that need to be addressed when selling a business is the critical discussion of the life-changing implications of a liquidity event. Having these pre-transfer discussions along with a vision for how you want to use your money is vital for several reasons:
Providing a More Secure Retirement
If you and your family would like to have ongoing income to support your retirement needs, there may be ways to construct the sale to do so. For example, any real estate used by the business could be held in your name, so you can receive rental income for a period of time. You also need to consider whether any other company-provided benefits, such as health insurance could be continued as part of the sales agreement.
Plan for Major Purchases
It’s not uncommon for exiting business owners to celebrate the “ringing of the bell” by splurging on some big ticket items, such as a luxury car or a vacation home. These purchases should be planned as part of the vision you share with your spouse in light of your other wants and needs.
Create a New Vision for Your Future
What are your new priorities? Are they the same for you and your spouse? These discussions begin at home, but it’s often helpful to enlist professional advisers to think through the details. Sometimes there’s a need to change or add additional advisers if you have significantly more net worth than you’re comfortable handling on your own.
Determine Your Lifestyle Needs
How will your family meet its objectives with the new balance sheet? With the liquidation of what is typically the primary asset of a business owner’s family, the necessity to manage objectives, income, and risk becomes paramount.
Many families are challenged to successfully navigate the change and sustain wealth across generations.
To be prepared, careful financial modeling and testing are needed. The following basic elements of a plan should be considered well in advance of the sale of the business:
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- Define objectives with realistic values and growth expectations.
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- Determine the appropriate safety net size for your family.
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- Design and implement a strategy to support future lifestyle needs.
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- Identify aspirational objectives and generational intentions.
- Identify aspirational objectives and generational intentions.
Identify Tax Savings Opportunities
When established and funded in the same year as your transaction, a Donor-Advised Fund (“DAF”) can meaningfully reduce the capital gains tax associated with the sale of your business.
Simply put, a DAF is an entity that allows donors to make charitable contributions, receive an immediate tax benefit, and then distribute donations from the fund over a period of time.
Typically, the maximum tax savings occur if you gift shares of the company into the DAF before finalizing your business sale contract. That said, even if you make a gift post-closing, you still have the benefit of making a single deposit, getting a tax break, and then distributing funds to charities you wish to support in future years.