Transitioning from owning a business to retirement requires careful planning and distinct considerations. Crafting an ownership transition plan that optimizes your business’s value demands time and effort. The right course of action will set the stage for your company to thrive and ensure both your personal and business goals are achieved. With so much at stake, all business owners should begin planning for their eventual transition well before any transition.
While there is much to consider as you get deeper into the planning and preparation phase, here are some questions to consider and actions to take in the early planning stages:
Are my business goals in alignment with my personal goals?
Begin assessing if your personal, financial, and business goals align and support a business transition. Determine if selling the business will help you achieve personal goals and what you intend to do post-transition. A departing business owner must be ready for a seamless transition. Otherwise, one or more areas of your life may suffer and cause unnecessary stress.
Finding a Purpose
Business owners often put significant time, effort, and thought into growing and running their businesses. Thus, it is common to feel a loss of identity and purpose once the business is sold. Before beginning the business sale process, consider what you want the next chapter of your life to encompass.
- What becomes important to you now?
- Would you like to help your children or grandchildren pay for college?
- What do you want your legacy to be?
- Do you want to start another business venture?
Developing a Comprehensive Financial Plan
A well-orchestrated financial plan can help ensure that business owners are armed with the knowledge they need to make informed decisions and provide peace of mind to comfortably transition into the next phase of their life without any financial surprises. As a business owner, you may be used to generating a certain level of income from your business. After your business sells, however, that could change.
Your financial plan should tie all your assets and income streams together and give you a true understanding of the after-tax proceeds you will need from selling your business to support your desired lifestyle and wealth transfer goals. Examples of financial goals might include traveling, purchasing a vacation home, or saving for a child or grandchild’s college education. In addition, your financial plan can also evaluate various scenarios that are often inherit in a business sale, such as selling the business at various points or different sale structures.
Tax planning is essential to selling a business, as it can help maximize the after-tax proceeds available to the business owner and their family. The tax implications of a business sale can be complex and depend on various factors, such as the type of business entity, the length of time the business has been owned, and the sale structure. It is important to consult with your tax professional early on so they can advise you on options to help mitigate tax consequences.
If your business is a C corporation or S corporation, deciding whether to structure the transaction as a stock sale or asset sale may have a meaningful impact on your overall tax burden. Generally, a stock sale is preferable from the seller’s lens. In a stock sale, the seller’s profits are taxed at favorable long-term capital gains rather than ordinary income rates. In contrast, asset sales generally generate a combination of ordinary income and capital gains depending on how the sales price is allocated. Remember that if you have a C corporation, you may also be subject to double taxation, which could take a significant bite from your business sale proceeds.
The timing of receipt of the proceeds may also impact your tax liability. An installment sale allows the buyer to pay the seller over time rather than the full purchase price upfront. This allows the seller to spread tax liability over a more extended period, potentially reducing the seller’s tax burden in any year. However, it is important to note that an installment sale may carry some risks for the seller, such as the risk of default by the buyer or increasing tax rates in the future.
Business owners can enhance their preparation by revisiting their existing estate plans. Currently, the lifetime gift and estate exemption is $12.92M per person. This means you can gift up to $12.92M over the course of your life without paying estate tax. However, this exemption will revert to $5M (indexed for inflation) at the end of 2025 and could be reduced sooner depending on legislative changes.
If your financial plan illustrates that you have sufficient assets to fund your day-to-day living expenses and there are still substantial assets remaining, you may want to explore estate planning strategies to take advantage of the higher exemption so you can shield a larger portion of your assets from estate taxes.
If you are charitably inclined, it might make sense to gift to a charity in the year of your business sale to offset your tax burden. Donor-advised funds are a popular tax-advantaged vehicle for giving because they allow you to front-load or combine multiple years of charitable contributions into a high-income year. You will receive an immediate tax deduction and then can make grants to charities over time. Another strategy for giving is to create a charitable trust and list the charity as the full or partial beneficiary. However, there are many options for effective giving, so it is crucial to work with your advisor to select the path that best fits your goals.
Preliminary Due Diligence
To ensure a smooth transition, it is essential to have all documentation and operations prepared when planning. Whether you intend to sell your business to a third party or pass it on to employees and shareholders, several factors require consideration. These may include updating legal contracts, securing appropriate insurance, and ensuring IT programs are current.
Likewise, before transitioning your company, you must ensure your financials are in order and can withstand scrutiny from a 3rd party. Conducting an internal audit can help ensure all documentation is accessible and easy to locate and provide a clear understanding of the business’s financial status to anyone taking over its operations. Furthermore, establish KPIs and track your metrics carefully during this time. This is important to buyers and can help you refocus on potential improvement opportunities.
Establish Your Team
Exiting a business means different things to different people. Depending on your personal goals and situation, exit strategies can vary by structure and degree. On one end of the spectrum, one may want to free up resources to pursue other interests, while at the other end, they may wish to sell their investment and exit the business entirely.
Various exit strategies exist; choosing the appropriate one beforehand can increase the chances of leaving the business on desired terms and conditions. The right team will work with you to understand your objectives and critical business characteristics, help you understand a baseline value given company specifics and the current market, and, most importantly, work with you to identify the transition option to achieve your goal.
Transition planning is not a single event. Instead, it is a process that takes time to do well.
If you have questions about transitioning your business or learning more about planning for your future, let’s talk.
Meet the Experts
Senior Business Advisor
Brian Andreosky, CEPA
Aldrich Capital Advisors LP
Brian Andreosky joined Aldrich in 2019 and is dedicated to helping business owners transition their companies. In this role, he provides exit planning services to help business owners find the right solution to transition and maximize the value of their business. Brian is a member of the Exit Planning Institute (EPI). Prior to joining Aldrich,... Read more Brian Andreosky, CEPA
- Closely-held business and owners
- Business succession planning
- Business planning and analysis
- M&A and capital raise transactions
- CEPA, Certified Exit Planning Advisor
Director of Financial Planning
Tawny Ramones, CPA
Aldrich Wealth LP
Tawny Ramones specializes in developing and implementing comprehensive financial plans that provide clients the best opportunity to achieve their cash flow, investment, insurance and estate planning goals. Prior to her career in financial planning, she concentrated on strategic tax planning and compliance for high-net-worth individuals. Tawny received a Bachelor of Science degree in business administration... Read more Tawny Ramones, CPA
- Financial planning
- Wealth management
- High-net-worth individuals
- Certified Public Accountant