Exit planning is your strategy for smoothly transitioning out of your business, giving you control over your business’s future and getting back some of the value you’ve created. The process can present challenges – like financial risks, regulatory hurdles and emotional barriers – that can disrupt your exit if you’re caught off guard. Understanding the process can help you navigate the challenges and optimize your strategy for a seamless transition.
Quick facts
- Exit planning helps business owners and entrepreneurs step away from their companies when and how they choose.
- Strategic exit planning can help minimize taxes and improve the company’s value and marketability.
- Common exit planning strategies include family business succession, management buyouts, liquidation, and mergers and acquisitions.
Understanding exit planning
Exit planning is the process of preparing your business for a sale or transfer. A well-crafted exit plan ensures your eventual departure aligns with your personal and financial goals so you can step away confidently – and ready for your next chapter. While exit planning is a very personal decision, common exit options include:
- Family succession
- Management buyout (MBO)
- Mergers and acquisitions
- Liquidation
- Initial public offering (IPO)
- Partner or investor buyout
Keep in mind that the right exit plan for you depends on your financial, lifestyle and legacy goals. Ideally, you’ll start working on an exit strategy several years before you anticipate stepping away from your business. That way, you’ll have ample time to plan a smooth transition and address any challenges along the way.
Key components of effective exit plans
An effective exit plan includes several components to ensure financial, legal and tax implications are considered.
Financial aspects
Understanding your company’s value is an essential part of exit planning as it drives strategic decisions and allows you to set realistic expectations. Common valuation methods include:1
- Asset-based approach: The asset-based approach determines a company’s value by assessing the fair market value of its assets and liabilities. It’s commonly used for asset-intensive businesses like manufacturing and real estate firms.
- Income approach: The income approach focuses on a company’s ability to generate future earnings and cash flows. It can be beneficial for businesses with strong profit-generating potential.
- Market approach: The market approach determines a company’s value by comparing it to similar businesses that have been sold or are publicly traded. This approach is useful when there’s an active market for comparable businesses.
Cash flow management is another financial consideration. Strategies include using data and market trends to project future cash flow needs, setting clear payment terms, negotiating favorable vendor agreements and maintaining a cash reserve for unexpected expenses or slow revenue periods.
Legal and regulatory considerations
Contracts and agreements – such as purchase and sale, asset transfer and stock transfer agreements – are essential for formalizing your exit plan, as they protect the interests of everyone involved in the transaction. Review these documents carefully to help ensure there’s nothing that could affect the sale or transfer of your company.2
It’s also important to consider your business’s ownership structure, as it can affect the overall exit process. For example, limited liability company (LLC) ownership interests generally transfer according to the company’s operating agreement, while corporations can issue shares of stock or sell percentages of the business.3
Tax implications
A key consideration when selling your business is whether to sell the company’s assets or your stock in the company. Generally, sellers prefer stock sales because gains will likely be taxed at the favorable long-term capital gains rate, while asset sale proceeds are often taxed at higher ordinary income tax rates. Buyers frequently prefer asset sales because they can immediately depreciate those assets, lowering their tax burden.4
Common challenges in exit planning
Exit planning can come with several challenges, including emotional barriers, regulatory hurdles and financial risks.
Emotional barriers
Exit planning can be a complex emotional journey, bringing a mix of relief, anxiety and uncertainty – especially if you’re stepping away from a business you built over years or even decades. Keeping a positive mindset is key. To manage the emotional transition, start planning early to give yourself enough time to adjust to the idea of exiting. Be sure to look beyond the exit: Prepare for your post-exit life with new goals, hobbies and projects to enjoy during your next chapter.
Regulatory hurdles
Regulatory hurdles can make exit planning complex and delay the process. For example, antitrust laws can prevent sales to competitors if they reduce market competition, and you’ll need to follow strict securities regulations if you’re selling stock. You’ll also have to address contracts, employment laws and industry regulations to prevent disputes, delays and damage to the company’s reputation.
Financial risks
Financial risks can impact the sale price and the overall success of the transition. For example, buyers may offer lower valuations if demand is low or industry trends shift. Economic downturns can also reduce buyer interest, limit financing options and force sellers to accept less favorable terms.
Strategies to optimize exit planning
Due diligence and effective negotiation can help ensure a smooth transition.
Due diligence process
Due diligence before selling or merging your business can help you:
- Fix issues early: Checking your finances, legal records and operations lets you spot and fix problems before buyers find them.
- Get a better price: A well-prepared business with transparent financials and no hidden risks is more attractive to potential buyers.
- Avoid delays or deal-breakers: Resolving debts, legal issues and inefficiencies ahead of time keeps the sale on track.
- Check the buyer’s background: Looking into the buyer’s financial stability and reputation can help you uncover potential red flags and avoid last-minute problems.
Negotiation tactics
Successful negotiation can mean the difference between a mediocre deal and an outstanding one. Before starting negotiations, it’s important to understand your company’s value. Evaluate factors like revenue, brand reputation, growth potential and competitive advantages to set a high anchor price that you can justify with facts and data.
Be open to compromise as you negotiate price, payment schedules and other conditions, and aim to be flexible while knowing your limits. A key part of successful negotiations is building trust with your potential buyers. Be sure you communicate clearly and remain open to discussions to ensure a fair and mutually beneficial outcome.
Working with a financial advisor
If you’re unsure where to start, consider talking with professionals specializing in exit planning. The right team – such as a financial advisor, attorney and accountant – can assess your situation and develop an exit plan that aligns with your personal and business goals. That way, you’ll be ready to exit your business on your terms while getting back some of the value you’ve created.
Bottom line
Exit planning is your blueprint for transitioning out of your company while maximizing its value. It’s a good idea to start planning early so you have time to improve your financials, strengthen operations and make your company more attractive to buyers. Consider working with a financial advisor who can help you navigate the exit planning process – from choosing the best exit strategy to negotiating terms – so you can achieve the best possible outcome.
Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). Neither Summit Financial nor Conway Wealth Group provide tax or legal advice. 7730727.1
- U.S. Small Business Administration, “Close or Sell Your Business.” (July 2024)
- Goldstein Patent Law, “Legal Considerations for Business Exit Planning.”
- MyCorporation, “LLC vs. Corporation: Everything You Need to Know.”
- Bessemer Trust, “Tax Considerations When Selling a Business.”
