Exit Planning Options For Older Business Owners | Succession Plan | Rea CPA

Exit Planning Options Every Business Owner Over 50 Should Know

This article is part of our Small Business Corner series, which is designed to address challenges and considerations regularly faced by owners of small- to mid-sized businesses. Check out past Small Business Corner articles at www.reacpa.com/small-business-corner.

Don’t Leave Your Legacy Up To Chance

Exiting your business will be one of the most emotionally difficult things you’ll ever do. But one of the best things we can do for you and your business is to ditch the cookie-cutter exit plans and design an option that addresses your unique goals and objectives. This is OPTION PLANNING. It is the chance to architect your exit. Regardless of how you plan to make your exit, an exit planning advisor can help you understand your options – and which ones will hurt the least.

Transfer Your Company To Key Employees Or Management

One of the most common and least risky exit paths, this strategy helps you maintain control and add to the value and growth of the company until all sale proceeds are received.

Internal buyers are usually more likely to stay true to the legacy you worked so hard to build, so transferring your business to key employees could help keep your legacy, culture, benefits, and staff intact.

This type of sale typically yields more income over the course of a multi-year period, which gives you time to phase-out of the business and prepare for retirement. It can also minimize your income tax consequences.

Internal buyers are usually more likely to stay true to the legacy you worked so hard to build, so transferring your business to key employees could help keep your legacy, culture, benefits, and staff intact.

Keep It In The Family

Want to provide for your heirs and preserve your legacy? You might consider selling to family. Grooming a family member as your successor can result in a smooth transition that can be completed over time. However, this exit plan could create some family conflict as you assess who is in charge or who is qualified to lead. You might also have to restructure the business to ensure the transfer benefits from the transition.

As with most succession strategies, one of your goals will be to minimize taxes upon death. This option can help you accomplish that.

Selling To A Third Party

Maybe you’d rather just put your business up for sale. A successful business shouldn’t be on the market for long and, in the end, your assets and goodwill can be considered when valuing the business to help maximize your return. If your business is only marginally profitable, on the other hand, it can be more difficult to sell.

Unfortunately, you might discover that your business is worth less than what you thought. When this happens, plans have to change. However, if you plan your exit ahead of time, you can actually add value to your business.

Just remember that, once you sell and walk away, the new owner can do whatever they want with the business. This can be particularly tough if you have trouble letting go.

Employee Stock Option Plan (ESOP)

These complex plans can be attractive because of their minimized tax consequences and the protection of employees. However, financial issues can arise if you’re not careful. For example, you might have to accept a promissory note for part of the purchase price. Or maybe you’ll have to guarantee bank financing to buy stock.

An ESOP also depends on management to continue the company’s success. If the company doesn’t produce the necessary cash flow to pay off any debt owed to you as the former owner, your financial security is compromised.

Tax-wise, if structured properly, ESOPs can be favorable, but they also come under much IRS and DOL scrutiny. A Certified Exit Planning Advisor (CEPA)
will work with you to minimize or eliminate ESOP challenges and help you achieve your goals, but the entire process can take years.

Listen to episode 205 of unsuitable on Rea Radio, “What Is An ESOP And How Does It Work?” to learn more about this option.


Ready to close up shop and sell off your assets? Consider liquidation. Liquidation is great if you don’t have a buyer lined up,
and you’re looking for a relatively quick solution. This option brings the lowest return on investment and creditors to have first claim on any funds generated from the sale. However, one option might be to extract business profits overtime before selling the business. Unfortunately,
this method could also reduce the eventual sale value of the business. And, as salary is taxed as personal income, there will be capital gains to contend with when the business is finally sold.

No Exit Plan

Even though it’s not the best option, you do have the option to have no plan at all and essentially work until you no longer can. If you take the “no exit plan” plan, it’s probably because you either really, really enjoy what you do, or the company has no transferrable value and will fail without you; or you simply need that steady income. Even so, there are some tax advantages to be found. For example, your estate will enjoy a step-up in basis when ownership transfers and estate taxes might no longer be a concern. Additionally, if you want to keep your business in the family, you can transfer ownership of the business at death to whomever you wish and avoid capital gains taxes. Good estate planning is a must for this route.

The best exit strategy for you is one that best fits your business and personal goals. We have a team of CEPAs to help you pick the option that best suits you. Whichever exit strategy you choose, don’t put off getting started. Planning in advance gives you the time to do it right –
and maximize your returns. Contact Rea & Associates’ valuation and transaction advisory services team to discuss your options.

By Paul Weisinger, CPA/ABV, CVA, CEPA (Cleveland office)

Want to learn more about putting an exit strategy in place? Check out these resources:

Podcast: How To Successfully Exit Your Business

Podcast: State & Local Tax Surprises That Hurt Business Value

Podcast: How To Sell Your Business For Top Dollar