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If you are a business owner, you will eventually step away from the company you have built. You might cash out to the highest bidder or work out a deal to sell the business to the next generation of your family or even to employees. The question is will you be able to make this transition on your own terms? The reality is that most business owners do not have a clear, documented exit plan. And if you find yourself among them, you could find it leaves you in a tight spot when it is time for you to step down.
A delay in planning your exit risks settling for a below-market sale price, losing control of choosing your successor or rushing into choices that do not reflect your vision. Delays also leave you with little time to take steps to boost the business’s valuation and ensure business continuity. A clear exit plan helps maximize options and value. If you have not mapped out yours yet, there is no time like the present. Consider the following steps.
Proper valuation of your business is the first step in exit planning. Some back-of-the-envelope math can provide a decent starting point. But to really understand what your business is worth, meet with a valuation expert. Besides a healthy dose of objectivity, these professionals bring market expertise and a knowledge of valuation standards. They can identify intangible sources of value you may have overlooked and help ensure your valuation passes muster with potential buyers and the IRS.
There are three main approaches to determining value:
You may find one approach is more apt than another for the type of business you own, but a comprehensive valuation is likely to incorporate all three in one way or another. Bear in mind that valuation is not a one-time event. As your business grows and market conditions change, you will likely want to update your valuation.
Before you can build an effective exit plan, it is necessary to clarify your goals. Be as specific as possible as you define what a successful transition looks like to you.
Some questions to keep in mind:
The answers to these questions will guide the decisions that follow.
With valuation and goals in hand, there are a range of steps you can take to support your transition. What you do will depend largely on the type of exit you are planning. For some owners, you might make strategic adjustments to boost the value of your business, such as reducing unnecessary expenses or diversifying revenue streams to make your company more attractive to buyers.
If your plan involves transferring the business to a family member or a long-time employee, the sooner you identify them, the better. That way, you will have plenty of lead time to train them in the leadership skills necessary to provide a smooth handoff. Depending on your situation, you might consider a sale, a gift, or a combination of the two. Be aware that gifts to family members above the lifetime gift and estate tax exemption ($15 million for individuals in 2026) might trigger gift taxes. Meanwhile, sales to employees could trigger capital gains taxes. If your business is structured as an S corp or C corp, you might consider an employee stock ownership plan (ESOP), which could defer or even eliminate capital gain taxes if structured properly.
Seeking an external buyer? Preparation is equally as important. In addition to boosting your valuation, you will need to organize your financial records, legal documents, contracts, employee agreements and operational procedures. One thing to consider is the type of deal structure that works best for you. Would you like to be paid over time or in one lump sum? And would you like to exit the company immediately or would you be open to staying on in an advisory capacity to help the new owner learn the ropes?
Begin the process of finding and vetting buyers early. These could be industry competitors, investment groups or individual entrepreneurs who may be a good fit. A business broker can help you identify potential buyers and spread the word through their network.
For many business owners, exit planning rarely tops the to-do list. After all, there are plenty of day-to-day demands competing for attention, let alone the fact that it can be difficult for owners to think about the day they will no longer lead the company they built. Yet the most successful exits are those planned in advance, allowing owners to optimize value, identify an ideal buyer or successor and prepare their employees for a smooth transition.
This post was written and first distributed by The Writing Company.
DISCLAIMER
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
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