Business owner exit plan

Exit Planning: The Business Owner’s Guide to Transitioning on Their Own Terms

Operations, strategy and planning, financial management, marketing and sales, human resources, and risk management occupy the minds and agendas of successful business owners year after year, decade after decade. The steps it takes to transition away from a business are alien to these, are complex, and vary greatly depending on the circumstances of the business and the owners. Where demanding circumstances are present in the business’s life cycle, exit planning is challenging at best. It is next to impossible to tear oneself away from the rigors of running the business and sustaining growth to deal with transition issues.

Understanding Exit Planning

There are several elements to successful exit planning. Ideally, your planning includes a written plan and goals, with dedicated attention to financial aspects, and an estate plan that provides for legal instruments and tax minimization. You should also consider what you will do with your time after successfully exiting your business, such as travel, philanthropy, or getting involved in another company. Many people will benefit from thinking about and planning for emotional impacts. Successful execution often involves consultation with legal and financial advisors to ensure compliance with legal requirements and economic security.

Pitfalls to Avoid

First, when owners do decide to exit, they often realize they have not allowed themselves enough time to position their businesses for transition, minimize taxes, and maximize net proceeds. Owners who do not have enough time to properly position their businesses for transition may end up selling for less than they could have if they had taken the time to prepare. This is because potential buyers will be less willing to pay a premium for a business that is not in good shape.

Owners who do not take the time to plan their exit may end up paying more taxes than they need to. This is because there are a number of tax-saving strategies that can be employed when selling a business, but these strategies must be implemented well in advance. Similarly, owners who do not have a well-thought-out exit plan may run into legal problems down the road. This is because there are a number of legal issues that need to be addressed when selling a business, such as employment contracts, non-compete agreements, and intellectual property rights.

A rushed and poorly planned exit can also damage employee morale. This is because employees may feel uncertain about their future with the company and may start to look for other jobs. To avoid these problems, owners should begin planning their exit well in advance. This will give them plenty of time to position their businesses for transition, minimize taxes, and maximize net proceeds.

Entrepreneurs are often caught off guard when an unforeseen event occurs, compelling them to exit their venture on unfavorable terms and within an undesired timeframe. Conversely, some owners may be fortunate enough to receive an unsolicited offer from an interested buyer. Nonetheless, their unpreparedness impedes their ability to maximize the value of their business in either scenario. Sometimes, an owner is unable to finalize a transfer of the company to an interested party as he fails to meet the due diligence requirements necessary for the completion of the sale. Private equity and strategic purchasers are highly experienced and wary.

Additionally, business owners might be ignorant of the fact that their internal choices, such as transferring ownership to a family member or staff, have been eliminated due to the inability of the business to operate without them. It may also be undercapitalized, have insufficient cash flow, or be excessively risky for an internal option to succeed.

The Role of Estate Planning in a Business Owner’s Exit Strategy

Traditionally, the goal of estate planning is to protect assets for the owners, their households, and heirs. This includes deciding who will take over the business in the future, possibly identifying and preparing a successor, and piloting the control and ownership of the business after the owners step away. Continuity of operations is key, as is avoiding a fight over control of the company. Where possible, estate planning tools that provide asset protection and minimize taxes should be implemented. Consulting with legal and financial professionals specializing in estate planning and business succession is crucial to developing an effective strategy tailored to the owner’s specific circumstances and goals. An estate planning attorney can draft the legal instruments to effectuate your wishes, and bankers, insurance advisors, and financial managers can provide other needed information.

Exit Planning in Special Circumstances

Unique challenges may exist for solo entrepreneurs and international business owners. Solopreneurs may be more emotionally entangled in their business and their personal and business finances as well. Succession planning may be more difficult if the owner is solely responsible for the business’s success, and finding a buyer may be more difficult. For cross-border entrepreneurs, estate planning involves complicated legal, tax, and regulatory issues that vary from country to country. Different jurisdictions have inconsistent, if not conflicting, laws on tax, inheritance, and business ownership. Solopreneurs should start early on, and international business owners should engage more advisors to ensure success.

Maximizing the Worth of Your Business and Preserving Your Estate

We aim to empower you with maximum freedom and opportunity for your post-business life. Our skilled legal professionals will provide legal advice to fortify your wealth, enhance your well-being, channel assets to your chosen heirs, and mitigate potential risks and expenses. We stand ready to assist with any inquiries, offer sound legal counsel, assess your estate planning, and tackle any necessary tasks to propel you forward.

Contact the dedicated team of attorneys at Lowthorp Richards for trusted guidance in digital asset management and estate planning by dialing (805) 981-8555 or completing our convenient online contact form. Our legal practitioners are deeply rooted in the California Tri-Counties region, serving Ventura, Santa Barbara, and San Luis Obispo.

NOTE: The information contained herein is not intended to be legal advice and the reader should know that no Attorney-Client relationship or privilege is formed by the posting or reading of this article which is also not intended to solicit business.

Cristian R. Arrieta, Lowthorp Richards McMillan Miller & Templeman, A Professional Corporation, 300 E. Esplanade Drive Suite 850, Oxnard, CA 93036