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Exit Strategies: What’s Your Plan to Eventually Cash Out?

June 25, 2024

Do you have a long term strategy for exiting your business? Here are some tips as you assess your current financial situation and determine the right path forward.

Owners of growing businesses usually work long hours, but no one wants to work forever. That’s why you should have a long-term strategy for exiting your business. The right strategy hinges on several key factors, including the value of your business, your financial resources, your retirement goals, and your family’s interest in taking over the business.

Evaluate the Options

There are many different exit strategies to consider. For example, you could transfer the business to family members, through gifts or by selling interests in the business to them over time. Or you could sell the company to other owners, your management team, a third-party buyer, or through an employee stock ownership plan (ESOP), where employees buy shares of the company. Other strategies include mergers, acquisitions, and management buyouts (MBOs).

The first step is to obtain a formal business valuation to get an idea of what it’s currently worth. A formal valuation is typically conducted by a professional appraiser who considers various factors such as your company’s financial performance, market conditions, and assets. Then you can figure out how its value fits into your personal and financial retirement goals.

Estimate Your Retirement Needs

You’ll need to answer the following questions to help decide what’s right for your situation:

  • How much money will you need to support your desired lifestyle in retirement?
  • What other sources of income, outside of your business, do you expect to receive during retirement (such as Social Security payments, withdrawals from retirement savings, pensions, rental income, dividends from investments, and other investment income)?
  • When will you be financially and emotionally ready to relinquish control over the business?
  • Do you plan to continue working at the company after you transfer ownership?

Another issue to address is whether your children or other family members (or your management team) are able and willing to take over the business. If not, a sale to a third party may be the option that maximizes the value you’ll get from your business.

It’s also important to evaluate the business’s future growth potential — especially if you plan to hold on to a minority interest in the company or will receive earnout payments based on the company’s future performance. Conducting a market analysis or seeking expert advice can help in assessing this potential accurately.

Time It Right

If you decide to sell your business, timing is critical. Obviously, the owner’s age, health, and personal goals factor heavily into timing. But it’s also important to consider external factors, too.

If you plan to gift all (or part) of your business to family members, you might want to get the ball rolling sooner rather than later. For 2024, the lifetime gift and estate tax exemption is $13.61 million ($27.22 million for married couples). Under current law, the exemption is adjusted annually for inflation. However, after 2025, it’s scheduled to revert to pre-2017 levels (adjusted for inflation), unless Congress passes legislation to extend the current amount. So, you might want to consider making gifts to family members in 2024 or 2025 to take advantage of this limited-time opportunity to transfer value out of your estate.

Conversely, if you plan to sell your business, it’s important to evaluate the outlook for your industry and whether your business has significant potential to appreciate in value. If so, you might want to hold on to the business until it reaches its maximum potential value, especially if you enjoy working and are willing to delay retirement. Holding on for a few extra years could give your management team extra time to mature and allow you to groom them to take over the reins. Or you could possibly hire an outside professional management team that can take your business to a higher level, thereby maximizing your payout.

If your business has more than one owner, you might decide to sell your interest back to the company or to the other owners. If you decide to go this route, a buy-sell agreement is essential, particularly if you unexpectedly leave the business for health or other reasons beyond your control. The agreement should address such issues as the method for setting a price for your interest, how the buyout will be funded, and when payments will be made to the departing owner (or his or her estate). Working out the details in advance can alleviate disagreements between the owners when an owner retires or otherwise leaves the business.

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