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Estate Planning Strategies for Business Owners Planning an Exit

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After likely spending a lifetime building your business, deciding to exit can be a hard choice. It’s made even harder if you don’t have a comprehensive exit strategy in place. Senior wealth manager Susan Jones provides a guide to exit planning — from estate planning to liquidation strategies — to make the transition smoother for you.

It can be hard to let things go. And owners planning their business exits — whether to retire, start new ventures, sell, or pass them on to family — know this well. You spend a lifetime building your business, so it’s crucial to have a game plan when it’s time to leave. Being prepared will help optimize the transition from a financial and tax perspective. 

Leaving might seem like an afterthought with all the other considerations of being a business owner, but smart leaders know this mindset is a mistake. Your exit might not be as far away as it seems. In fact, two-thirds of high net worth business owners accelerated their plans to retire or sell their companies due to the pandemic, according to a 2021 Clarfeld Citizens Private Wealth survey. Unexpected events, be it an unforeseen pandemic or something else, that accelerate business plans are bound to happen. And early estate planning is crucial.

As a senior wealth manager with over 20 years of experience, I have helped many CEOs through this transition. This guide will cover the importance of tax and estate planning in your exit strategy, as well as the need-to-knows about when to start and what to consider as you plan an exit.

When to Start Creating Your Exit Strategy and Why

We’ve established this already: Start early. A long-term liquidation strategy is just as important — if not more — as short-term decisions. Ideally, you’d have created an estate plan when you first became involved with your business, regularly reviewing it as the business grew and time went on.

Why? From a legal standpoint, not having an estate plan could mean your interest goes through probate, which would be public and time-consuming, disrupting your business considerably. From a tax and finance perspective, no estate plan means missed opportunities to leverage discount gifting or other income tax-reduction strategies.

Items to Consider When Business Exit Planning

Here are questions you should ask yourself when thinking about exiting your business:

  • What is the exit strategy? Do you plan to sell, go through an acquisition or merger, have a family member take over, or something else? Who will the business owners and managers be? 
  • What do you, as the current owner, want and need when it comes to the business at exit (i.e., a gift component, paid over time, etc.)?
  • Do you have a charitable intent? If so, will it provide a tax advantage that can coordinate with the business sale? Structuring a gift far in advance helps avoid using a reduced fair market value and having it deemed as a cash gift, for example. Or you could ensure optimal timing by obtaining a deduction at the highest marginal rate.
  • If your children are your business’ successors, will all children participate equally? If not, decide if you want to equalize their inheritances using other assets, such as life insurance.

Once you’ve thought about these questions, outline your long-term plans for the business. Plans will look different for every business owner. What you do with your business is, well, your business. Plan early and often, including all involved parties in the conversations.

Transferring the business to family members instead of an outside party or parties typically looks very different from a normal sale. With family members, much thought goes into who is involved and how the ownership and management will be coordinated. Maybe you divide the business ownership equally despite one child being more of an active employee than the other. Or perhaps you don’t. Ask yourself how you want to equalize your children. Say, for instance, you only have one of three children active in the business. In that case, you might opt to divide by assets or trusts. With family, estate planning has you thinking in the long term when it comes to legal and tax implications.

On the other hand, maybe your exit strategy involves selling to a third party. Your focus in this situation would be on the terms of the transaction and the ways you can maximize after-tax considerations. The transfer is ultimately the assets purchased with the proceeds (often cash, marketable securities, and other passive investments). So, it is less critical for your liquidation strategy to incorporate terms related to long-term business ownership, which family takeovers often entail.

Top Tips for a Successful Business Exit

If you own and operate a business and are planning to leave within the next five years, consider these five strategies on how to develop an exit strategy:

  1. Clarify your retirement needs and goals. Business owners sometimes don’t realize that the expected investment income on the after-tax proceeds from the business sale will not be sustainable enough for the lifestyle they want in retirement. It’s helpful to work with a financial advisor to clarify how you want to live in the future and the funds you need to achieve that.
  2. Articulate your vision for the company’s future. When planning a business exit strategy, you should be able to outline your vision for who will own and run the business. Remember, the people who run the day-to-day operations might not always be the same people who own the company.
  3. Determine gifts. Decide if you wish to make gifts using business interests or sale proceeds early on and whether those will go to charities or family members. The earlier you plan, the earlier you can maximize the income and estate tax benefits when it comes to gifts.
  4. Work with an advisor who can tax model. Tax modeling is often an overlooked piece of tax planning. But it can cause you to lose significant tax benefits and create cash flow management issues. That is why you should work with a tax modeling expert to help you make the most of your tax benefits.
  5. Document thoroughly. All company records, business matters, and personal records must be well documented and easy for new owners to access and understand.

Looking further ahead, consider your plans for the five-plus years after the business transfer. You want to be prepared should any issues arise. Say you plan to retire in sunny Florida or another state without income taxes. Is there an opportunity to move there prior to your business ownership transfer? This can minimize state income taxes. Do you want to continue working in some capacity after your official exit? Negotiate a consulting agreement. Or will there be a non-compete clause to preclude you from doing so? No matter what you decide to do, you can never plan too early for your exit strategy.

Written by Susan Jones.
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CEOWORLD magazine - Latest - CEO Insider - Estate Planning Strategies for Business Owners Planning an Exit
Susan Wofford Jones, J.D. , CFP®
Susan Wofford Jones, J.D. , CFP® is senior wealth manager at Plancorp, a full-service wealth management company serving families in 44 states. Susan is a licensed attorney and CFP who passionately provides wealth management services to all walks of life. Jones understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes, and realize both their financial and non-financial goals.

Susan Wofford Jones, J.D. , CFP® is an opinion columnist for the CEOWORLD magazine. Connect with her through LinkedIn.