Business Exit Strategy

Build a Business Exit Strategy

Many small business owners have no exit strategy for their businesses in the event of their disability, retirement, or death. They spend all their time, not surprisingly, on business survival and growth. A business exit strategy, however, is vital to plan for the unexpected (financial hardship, injury, disability and even death) and for the succession or transfer of ownership of your business when it comes time to retire. So what can you do?

client building a business exit strategy online.

Small businesses make up 99.9% of U.S. employers. ¹
Only 30% of family-owned businesses survive into the second generation. ²
80% of companies seek assistance from advisors outside the firm for business transition. ³

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Planning Your Exit

: There is no "one plan fits all" when it comes to developing a succession plan for your business. But following SCORE's recommended four steps to succession planning (including choosing and training a successor) can help provide some practical direction and deliver the peace of mind that comes from knowing that your life's achievement is in good hands. You can also read more from the SBA about succession planning for family-owned businesses.
: As with career employees, you will want to ensure that you invest in a retirement plan, life insurance and even personal disability insurance — all of which will protect you and your family when it's time, forcibly or not, to step away from your business.

It's relatively easy to address retirement planning, because we all hope to get there and, more importantly, want to enjoy it. But life and disability insurance are equally important for the small business owners, because they protect you and your family, should the worst happen. Here are some tips for finding the right plans for you and your business:

Finding the right retirement plan: If you are a sole proprietor then you may want to talk to your bank about a setting up an IRA or other retirement solution. If you have employees, on the other hand, setting up a small business retirement plan for both you and your employees needn't be that difficult—and also offers a nice tax deduction.

Disability and Life Insurance Options: While some states require employers to provide partial wage replacement insurance coverage to their eligible employees for non-work related sickness or injury, most businesses opt to provide both disability and life insurance as part of an overall compensation or benefits plan.
: Whether you are selling your business, transferring ownership, seeking retirement, or facing a "forced-exit" such as bankruptcy or liquidation — planning your exit is a big undertaking that has implications on employees, your business structure, its assets, and your tax obligation. Before you embark on your exit strategy, be sure to engage your lawyer and even a business evaluation expert. That way, you will be sure that you have explored all the options available to you.

7 Small-Business Exit Strategies

When it’s time to move on from your small business, you have two questions. How are you going to get your money out of the business? And how much money are you going to get? Having a strategy worked out in advance will help you answer those questions. Here are seven strategies to consider.

: Close up shop and sell it all. For small businesses, especially those that are dependent on the performance of a single individual, this could be your only option. If you're in this position, you may want to consider retooling your business so that it could be operated by someone else — making it a business someone might want to buy.

Pros

It’s simple

It’s fast

Cons

Liquidation has the lowest return on investment to the owner(s) — goodwill value from client lists or other business relationships is lost.

Values for second-hand business assets such as machinery and equipment can be very low.

Creditors (if any) have first claim on funds from asset sales.
: Instead of reinvesting profits in the company for expansion, this strategy has you extract most or all of the profits out of the business over time (before eventually selling or closing the business). This is typically done by taking out large salary draws or dividends over a number of years before eventually winding up the business.

Pros

Maximizing cash withdrawal on an ongoing basis for personal use (rather than waiting for an eventual windfall from selling the company) lets you keep up your lifestyle.

Cons

Extracting profits diminishes your business’ growth potential and reduces the eventual sale value of the business.

While profits remaining in the company increase the value of the business and will be taxed as capital gains when the business is sold, salary is taxed as personal income.
: No explanation necessary, is there?

Pros

Ensures your legacy lives on.

Provides a living for your heirs.

May allow for you to keep a hand in the business.

Cons

Can lead to infighting among family members over ownership and/or participation in the business.

Family members may not actually have the skills to take over the business.
: Often, current employees are interested in buying your business.

Pros

Employees are already familiar with (and enthusiastic about) the business.

Arranging a long-term buyout by employees can increase loyalty and motivate them.

May allow for you to keep a share of the business or stay on in an advisory capacity.

Cons

Employees, though familiar with the business, may not be qualified to run the business.
: The most popular option for small businesses. When you’re ready to retire, put your business up for sale and hopefully walk away with your asking price.

Pros

If your business is profitable, it should be attractive to buyers and sell quickly.

In addition to assets, goodwill can be incorporated when valuing the business for sale, maximizing the return to the owner(s).

Cons

A marginally profitable business can be very difficult to sell.

Finding a buyer can be a long process.

Businesses can be difficult to value and the selling price may be much lower than expected.
: Businesses buy other businesses as a quick path to expansion, for synergies from complementary business activities, or simply to buy out the competition.

Pros

A competing business may be highly motivated to purchase your business for the reasons above. This would make for a quick sale and maximum profit.

Cons

Existing employees may lose their jobs if they are deemed redundant by the buyer or if the purchaser's only motivation is to reduce the competition and may fold your business.

Competitors may feign interest in order to access to your customer list and financial information.
: An IPO (Initial Public Offering) is not suitable for all small businesses, but in certain cases, it can be a viable exit strategy.

Pros

IPOs can be extremely profitable.

Cons

Becoming a public company is a long process.

Becoming a public company is an expensive process.

You may or may not be able to withdraw any of your capital at the time you go public. It depends on how the IPO is structured. (Shareholders may want to see all the money raised by the IPO be used to expand the business.)

Public companies have much higher compliance and reporting standards than private companies. You may be personally liable or subject to prosecution for any prior accounting "irregularities" or failures in disclosure.

IRS Closing a Business Checklist

It’s finally time to hang up your hat and close the doors. But how do you actually go about closing a business? The IRS says this:

There are typical actions that are taken when closing a business. You must file an annual return for the year you go out of business. If you have employees, you must file the final employment tax returns, in addition to making final federal tax deposits of these taxes. Also attach a statement to your return showing the name of the person keeping the payroll records and the address where those records will be kept.

The annual tax return for a partnership, corporation, S corporation, limited liability company or trust includes check boxes near the top front page just below the entity information. For the tax year in which your business ceases to exist, check the box that indicates this tax return is a final return. If there are Schedule K-1s, repeat the same procedure on the Schedule K-1.

You will also need to file returns to report disposing of business property, reporting the exchange of like-kind property, and/or changing the form of your business. If you do not have a pre-printed envelope in which to send your taxes, refer to the Where To File page for a list of addresses.

The IRS’ Guide to Closing A Business offers a list of typical actions to take when closing a business, along with PDF downloads for applicable forms.

Retirement Savings Tips for Small-Business Owners

Everybody should plan for retirement, but as a small business owner, you have some specific options others don’t. These should be a part of your overall business exit strategy — not for the business, but for you personally.

So start a diversified retirement plan. Now. Doing this will help trim your current tax bill and the funds will grow tax-deferred until you make withdrawals in retirement. Typically, the cost of opening and administering a plan is minimal. Ask if your advisor sells retirement plans to small business owners. There are four main options you’ll have to choose from: a SEP-IRA, a SIMPLE IRA, a Solo 401(k), and a SIMPLE 401(k). For all but SEP-IRAs, a business can be a sole proprietorship, a partnership, a limited liability company, or a corporation.

SEP-IRA: This is a tax-deductible retirement plan like a traditional IRA. It’s ideal for companies with just one employee — you. For 2024 tax returns, you could contribute up to 25% of your compensation or $69,000. Note that if you have other employees, you generally must also fund SEP-IRAs for them. ⁴
SIMPLE IRA: For owners with 100 or fewer employees. Contributions are pre-tax and taken directly out of employee paychecks, similar to a 401(k). Your contribution can’t exceed $16,000 in 2024. ⁵
Solo 401(k): This is specifically for self-employed people without employees (except perhaps a spouse). A Solo 401(k) Plan (a "one-participant plan") offers you the ability to contribute up to $69,000 in 2024. ⁶
SIMPLE 401(k): For businesses with 100 or fewer employees, you and your employees may contribute up to $16,000 for 2024. You, the employer, must make either a matching contribution up to 3% of each employee’s pay, or a non-elective contribution of 2% of each eligible employee’s pay. ⁸