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Quick Guide: Exit Planning for Family-Owned Businesses

Quick Guide: Exit Planning for Family-Owned Businesses

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If the COVID-19 pandemic has taught us anything, it’s that we don’t know what’s coming around the corner. And like the pandemic, the next thing that comes around the corner will likely be out of your control. But there is something you can control with some careful planning: the transfer of your family-owned business.

Let’s talk about business exit plans.

According to a 2021 study by PwC, only one-third of family-owned businesses have a detailed exit plan in place. While most business owners have an informal exit plan sitting in the back corner of their mind, it often hasn’t been documented, formed with the help of outside advisers or communicated to affected parties.

An informal plan isn’t good enough if you want to meet your lifestyle goals, obtain maximum value for your business or see your family legacy carried on.

What’s the Point of an Exit Plan?

Business owners often spend so much time pouring their blood, sweat and tears into growing their company that they forget to plan for the future.

An exit plan is a comprehensive roadmap for leaving your business. The exit plan includes a strategy that addresses financial, tax and legal matters, as well as your personal financial goals. An exit plan considers how to maximize your business’s value and how to minimize your tax liability.

Here’s a short checklist of what an exit plan should help you accomplish:

  • Exit the business in your desired time frame 
  • Realize personal financial goals 
  • Pay the least amount of taxes
  • Get through the process with the least amount of stress as possible 
  • Exit the business on your own terms 
  • Get the maximum value out of your business
  • See the business continue in capable hands, whether you transfer the business to family members or key employees 

How and When to Get Started with an Exit Plan

The best exit plans are often laid out long before a business owner is ready to actually transfer the business. Bonus points for the business owner who is willing to plan their exit during the business’s startup phase.

Successful family-owned businesses often common traits. Early on, we encourage our family-owned business clients to:

  • Define personal goals and a vision for the transfer of ownership and management
  • Develop a clear vision for the future of the business
  • Create a buy-sell agreement

Later, when you’re ready to set the balls in the motion to exit your business, you’ll want to:

  • Have a business valuation done by a certified valuation professional
  • Complete a financial analysis of your company and have a financial performance improvement plan completed before the sale
  • Complete an operational analysis of the company and have an operational performance improvement plan completed before the sale
  • Inform customers and other key stakeholders about your transition

There are many other factors and steps to consider that might be unique to your business and goals.

Ready to Move On from Your Business? You Have Options

There is no “one right way” to exit a business. It’s a personal decision for the business owner that should take into account multiple financial, legal, tax, family and lifestyle considerations.

As hard as it might be to leave the baby you created, there’s some good news: you have options.

Typically, those options fall into three buckets. You can:

Who Should Be Involved In Your Exit Plan?

You’ll need a team of advisors to guide you on strategies, tactics and all of the documentation you’ll need for a successful transition.

When you transfer a business, there are financial and legal considerations. At a minimum, you’ll want to get the advice of a:

  • CPA
  • Attorney
  • Certified valuation professional (your CPA might also be a Certified Valuation Analyst or Accredited in Business Valuation)

If you own a family business, you already know that family dynamics add a layer of complexity and emotion to operating the business. We suggest working with advisors who have experience with multi-generation businesses, which often have unique governance, family office, philanthropic commitments and estate planning considerations.

You might also want to consider the advice of your financial advisor or investment advisor to help align the sale of your business with your short- and long-term financial goals.

I’m Ready to Transfer the Business, But How Do I Know Much It’s Worth?

That’s where a business valuation comes in. Most business owners have a pretty good idea of how much their business is worth. But “pretty good” is not good enough when it comes to transferring a business.

There are critical life events that call for a business valuation and transferring your business is among them. You’ll also need a valuation when you create a buy-sell agreement.

A side note on business valuations: there are different kinds of business valuation reports available to you. Work with a Certified Valuation Analyst or an advisor who holds the Accredited in Business Valuation professional designation to determine what kind of business valuation report you need.

Plan, Plan, Then Plan Some More

Like many things in life, the more you plan your exit from your business, the more you’ll succeed. Taking steps now to plan your exit will help ensure a smooth transition later.  

Need Help?

There are lots of layers to a properly constructed exit plan. Likewise, there are moving parts that require periodic review, tweaking and oversight. We’re happy to help.

Contact us online or call 800.899.4623.

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Published on April 22, 2021