Key considerations before exiting your business

The best time to begin planning for the transition of your business was when it’s founded, but the second-best time is now. All business owners will eventually transition their business, whether by choice or necessity and whether they have planned for the transition or not. The most successful transitions are those where the owner started planning sooner rather than later and treated planning as a business strategy rather than an ending event. Regardless of where you’re at in this process, below are key considerations.

You know your business inside and out, but it is imperative to surround yourself early on with the right team of advisors who specialize in the various components of succession and wealth planning. No single advisor has all the necessary expertise to guide you down the right path, but the appropriate team of experts can identify and map out the complexities and bring objectivity to what can be personally and emotionally challenging decisions. This team often consists of the following:

• Investment Banker
• CPA
• Valuation Expert
• Wealth Advisor
• Business M&A Attorney
• Insurance Advisor
• Commercial Banker
• Estate Planning Attorney

There are two main types of taxes for a business owner to consider:

These taxes include such things as ordinary income tax and capital gains tax. How a potential transaction is structured can dramatically affect the amount of tax paid upon a sale.

In 2023, the gift and estate tax exemption amount is $12.92 million per individual (or double that amount for a married couple). In general, transfers of wealth, whether made during your lifetime or upon your death, that exceed your exemption amount will be taxed at 40%. Many business owners consider using some or all their gift and estate tax exemption amount to transfer ownership interests in their business to family through the use of specialized trusts and valuation discounts, which can result in a significant increase in the amount of wealth that ultimately passes to family members and others. 

You may have completed very little estate planning or extensive estate planning, but have you considered how your business interest factored into your plan? Do you intend to transition the business or wealth to the next generation (and, if so, is the next generation ready and willing to run the business)? Or would it make more sense to sell the business and ultimately pass liquidity to your loved ones? Understanding the options you have as a business owner to utilize estate planning techniques (including various trusts and through the use of valuation discounts discussed above) can optimize the financial outcome for your family, especially if done well in advance of transitioning the business. Your estate planning wishes can evolve over time as your business grows, your family develops, and laws change. It is important to review your estate planning documents periodically (at least every three to five years) to make sure they continue to carry out your wishes in an efficient and effective manner.

For an owner with family members working in the business, having conversations around goals and expectations well in advance of a transition will be a key planning component. Many business owners also express a concern with coming into liquidity and how their children and future generations will handle such wealth. Through proactive personal planning and next-generation education, this wealth can be managed through the use of family trusts and other planning vehicles that not only provide potential tax advantages but also protect such liquidity from spendthrift children and their creditors. 

In the year of a business sale, there will be a higher-than-usual income tax liability. If you are charitably inclined, this is a key time to consider larger charitable giving to maximize the tax advantages associated with such donations. This can be accomplished through donor advised funds, private foundations, and charitable trusts. Each charitable vehicle has different timing and complexity, and offers different tax advantages, so each option should be carefully considered and discussed to optimize the outcome for your family and the charity.