Successful business owners tend to plan ahead. Creating and updating strategies for business stability and growth helps companies move forward with purpose.
While general business planning is common, exit planning for business owners can be a blind spot.
That’s certainly understandable. There’s so much to consider, oversee, and manage in an active business. An owner’s personal strategy for retirement can fall by the wayside as more time-sensitive business issues emerge.
Putting off exit planning is understandable, but far from optimal. No one can own and run a business forever. Having a plan for selling your business helps you build a more secure financial future in retirement.
Keep reading to learn more about exit planning for business owners. Discover why it’s important for your personal finances and for the long-term health of your business.
Why Do Business Owners Need Exit Strategies?
For many business owners, their company represents an incredible investment of time, effort, and their wealth.
A single successful business is the culmination of decades of hard work and perseverance. For owners who operate multiple businesses, each one is a feather in their cap — and likely a significant source of income.
Many business owners count on their organizations to provide income that supports their families and lifestyles. They also expect that funds from their business, whether through a continued ownership stake or proceeds from a sale, will provide similar support in retirement.
Unfortunately, business owners can become consumed by the many demands and responsibilities of day-to-day operations and shorter-term strategies.
They simply may not have the energy or level of focus needed to deeply consider their own financial needs in retirement. They may have also invested a majority of their personal assets in the business. That can leave owners unprepared for retirement.
That said, it’s certainly possible for business owners to develop an exit plan that supports their own retirement and a smooth transition for the business as a whole.
Why Exit Plans for a Small Business, and Every Business, Matter
In terms of closing or transferring control of a business, there is a wide range of exit strategies for business owners. Investopedia highlights several common types of exit strategies, ranging from a buyout to bankruptcy.
Each one comes with its own costs, benefits, and tax implications. Choosing the right option can lead to a more financially stable retirement, one that supports your lifestyle after leaving the workforce.
Understanding your options for exiting your business empowers you to make more informed decisions about your future. Take taxes as just one example. Depending on the type of exit strategy used and the structure of each individual deal, tax implications can vary greatly.
Working with a fiduciary, a professional required to act in your best interests, can help you find the best path forward. That can be true for both your own finances and your long-term goals for your business.
An important point to keep in mind: Goals in exit planning are different for every business owner. They can include personal financial stability, the continued health and independence of the business itself, and much more.
Working with a financial planner can help you better navigate this very personal and important process. Financial planners with a background in exit planning can offer informed guidance and monitor the strategy moving forward. They can provide suggestions for maximizing the value of your business, protecting yourself from unnecessary tax burdens, and much more.
By working with a knowledgeable professional, you can build an exit strategy. One that takes your wants and needs into account and gets you closer to your desired outcome.
The Consequences of Putting Off Exit Planning for Business Owners
What happens when business owners retire or otherwise leave a business without an exit plan in place? Potential issues include:
- Higher taxes that can eat into retirement income and savings. A completed deal to sell, transfer ownership, liquidate, or otherwise exit a business usually can’t be revised or revoked. That can leave you exposed to otherwise-avoidable tax burdens.
- Reduced earnings from the sale of a business in whole or a portion of ownership. Exit planning can help make a business look more attractive to potential buyers. Without such a strategy in place, less money may be earned from the sale or transition. That’s true regardless of the specifics of the transaction.
- Not realizing the type of transition you want for your business. You might be interested in passing your business along to your siblings or children. Perhaps an employee buyout or even a liquidation is what you have in mind. No matter your specific goals, it can be harder to reach them without an exit plan that takes your finances into account.
- Problems for spouses and children when an owner passes away unexpectedly. A business owner who passes away without an exit plan can put additional stress on their family members. It’s another major responsibility for them to deal with in an emotionally draining time. Succession planning is an important consideration in this regard.
When Should You Start Considering Exit Planning as a Business Owner?
For owners, exit planning is a part of personal financial planning. A significant part of your income likely comes from your business. You may have substantial personal assets invested in your venture as well.
That’s why it makes sense to consider exit planning for small business owners, and owners of every type of business, early on. We suggest forming a relationship with a financial advisor well before you ever plan to leave your business. Building knowledge of your finances and plans for the future leads to informed support during and after your career as a business owner.
As a business owner, you likely have experience working with skilled professionals beyond your own staff to provide key specialized services for your business. Taking the same approach with your personal finances and business exit planning can offer similar results.
Work with a financial planner, and look for a fiduciary relationship that puts your needs first. It means one less thing to worry about while you’re running your business, as well as a more clearly defined and structured plan exiting it.
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