Wealth Insights

A five-step exit planning process for business owners

If you’re a business owner planning for retirement, you have much to consider. This five-step exit planning process can help ensure you’re well-prepared.

It’s not unusual for a business to account for the majority percentage of the owner's net worth — often by a wide margin. As such, business owners often rely on their enterprise not only to generate income today but also to provide for themselves and their family in the future.

Despite the potential risks, many owners have no plans in place to preserve their business in the event of their disability, retirement or death. A survey of U.S. family businesses revealed that only around one-third had a succession plan in place.¹

This leaves the owner’s financial security — and that of their heirs — vulnerable. However, with the support of an experienced wealth management professional, business owners can develop a plan that ensures a smooth transition and safeguards wealth.

“Designing an exit strategy today that integrates your estate, retirement and succession plans can help ensure a smooth transition while maximizing the value of your business,” says Bryan Koepp, Wealth Planning Executive for Regions Private Wealth Management.

The following five steps can help you get started.

Exit planning for business owners

Step one: Decide between selling and succession

Should you pass your business on, or should you sell it? This decision will guide everything from how you structure the business today to how you prepare for its sale down the road. However, this is often a hard decision to make, and ultimately the reason that many entrepreneurs postpone their exits. “Most business owners have spent their lifetime creating and nurturing the business, and identifying the right successor often seems an insurmountable obstacle,” says Koepp.

Delaying the planning for your business's eventual transfer, however, can come at a hefty price. In the worst-case scenario, all of your hard work could be lost if you unexpectedly pass away or become incapacitated without a contingency plan. And the longer you wait, the fewer options you will have to maximize your business's value and properly prepare a successor for a smooth and financially sound exit when you’re ready to retire.

Step two: Identify potential successors or buyers

Once you know how you want to transfer your business, the next question is, who will receive it? According to Koepp, there are three potential types of successors to a business:

• Family members
• Business partners or key employees
• Outside buyers

Many family business owners would rather just leave it to fate than choose among their kids — but that could be a disastrous mistake. Making the decision now based on your children’s skills and current involvement can head off disputes in the future and ensure the long-term viability of the company. More importantly, it gives you plenty of time to adequately groom the successor, which often takes more than five years, Koepp says.

Step three: Determine fair market value

Different exit strategies may require different valuations for your business. For example, if you want to turn it over to key employees through an employee stock ownership plan (ESOP), the company will need an appraised fair market value. Even if you are planning to sell it to an outside interest, you’ll need to know what your business is worth long before the negotiations begin, Koepp says.

Understanding the true market value of your business is critical to any succession plan. If you expect to pass it on to family members, the IRS will demand a third-party valuation to determine any estate tax liability, and both your retirement and your estate plan will hinge on that value.

Step four: Consider the impact on your estate plan

First, there is the issue of taxes. When creating your exit strategy, it’s important to visit IRS.gov and familiarize yourself with the latest estate tax guidelines, as that can have a significant impact on your plan. For example, if you plan to own or have an interest in the business until your death, you may need to account for that in your estate planning. Likewise, if the value of your business exceeds the estate tax exemption, the excess value may be subject to a hefty federal estate tax.

There are a variety of planning techniques that could be used to properly value your business and mitigate potential tax liability — while ensuring your business lives on according to your wishes. Even if your business is valued under any current estate tax exemption limits, you'll need to ensure your spouse and heirs are taken care of. For example, if the business is a partnership, you should consider putting a succession plan in place that protects each owner’s surviving spouse or heirs, either through a buy-sell agreement or a restricted stock arrangement. It’s important to consult an accountant to determine the right strategy for your unique situation.

Step five: Build a team

Between properly valuing your business and navigating tax liabilities, it takes a team to create a succession plan and prepare a business for a smooth transition. A certified professional accountant can provide a deep understanding of your company’s financial data and record keeping, while an attorney can draft key documents, such as buy-sell agreements and durable powers of attorney. Your Regions wealth advisor can lead this team to ensure coordination and make sure your financial goals — including your retirement, estate and succession-planning goals — are fulfilled along the way.

Benefits of exit planning

Ultimately, engaging in proper exit planning can enable business owners to:

1. Minimize taxes on a business transfer
2. Increase the pre-transfer value of the business
3. Plan around current laws favorable to attractive transfer strategies
4. Convert the entity’s structure to improve tax efficiency
5. Lower the costs of a transfer
6. Reduce stress
7. Build confidence in the company’s long-term prospects

Need help planning for your business’s future? Supported by a team of professionals experienced in estate planning and succession planning, your Regions wealth advisor can help you evaluate potential strategies that protect you and your family’s financial security.

Talk to your Regions Wealth Advisor about:

1. Your vision for the future of your business.
2. Launching a review of your legacy planning.

Get guidance on exiting your business.
Our wealth management guide can serve as your starting point.

Interested in talking with an advisor but don’t have one?
Find a wealth advisor in your area.

Sources:
¹PwC. “2023 U.S. Family Business Survey,” May 2023.