For most business owners, you probably can’t imagine a time when your business will no longer be a part of your life. It took a lot of hard work and dedication to build your company into what it is today. However, the time will come (and it should) when you’ll want to reap the rewards of your hard work and retire.
There are many ways to leave your business, but whichever road you chose, know that there will be a lot of planning involved. You need a succession or “get out of business” plan – and the sooner you have one, the better.
How Will You Leave?
The first thing to decide is how you want to exit the business. Below is a list of succession plan options in order of what typically produces the most cash:
- Gift to Family members
- Sell to Employees or Family Members
- Sell to a financial buyer
- Sell to an Employee Stock Ownership Plan (ESOP)
- Sell to a strategic buyer
Liquidation as a succession plan is easy to implement and is the fastest way to get out of business. However, it does not produce the best ROI. A business is so much more than the sum of its parts. Keep in mind that a good business reputation and goodwill go further than just buildings and inventory. When you liquidate, you lose the value of your intangible assets.
Another strategy you might consider is to gift your stock to your heirs, which is something best done when the value of your business is at its lowest and tax laws are most favorable. It’s also important to note that the TCJA did not repeal the federal gift and estate tax, but it did temporarily double the combined gift and estate tax and generation-skipping transfer exemption, which creates challenges and opportunities. The TCJA’s changes sunset at the end of 2025.
If you’re looking to sell the business intact, there’s much more to consider. Timing is the most crucial factor in both selling and transferring a business. Waiting until your business is no longer relevant is not a good plan.
Unfortunately, you can’t always predict the market, and there are factors beyond your control as to when the optimal time is to sell business. Economic conditions, industry trends, buyer activity and interest rates are always changing. Selling a business is about timing your business just as much as timing the market.
How To Prepare For Departure?
In a perfect world, the best time to sell your company is when its estimated cash flow is peaking, and the risk related to the business is low. Additionally, a when a business owner starts to think about retirement, they we will often notice that they will begin to wind down their business. Don’t. Mentally checking out doesn’t help you, your business or your cash flow. New clients still need to be pursued, and new products lines should still be launched. In general, avoid anything that could potentially lower the price you can get if you sell the business. If you are looking to sell, it is best to remain fully committed to keeping your business healthy while you look for prospective buyers. This extra effort now could mean a bigger payoff in the future.
Developing a business exit planning strategy and knowing how to get started is not an easy take. Luckily, we have professionals to help you through this process and pick a plan that makes sense for you and your business. With professional business planning, your business can continue to flourish into your retirement and beyond.
By Tim McDaniel, CPA/ABV, ASA, CBA (Dublin office)