Five Exit Planning Steps for Small Business Owners

By Tyler Harvey, CFP® | Sep 13, 2023 |

The day may come when you are ready to leave your business and cash out on your hard work. However, a successful exit requires careful planning and strategizing.

Here are five exit planning steps you need to take to maximize the value of your business and facilitate a smooth transition.

What are the most common exit strategies?

  1. Sale to a Third Party: Selling the business to an external buyer for a profit.
  2. Succession Planning: Passing the business to family members or key employees.
  3. Employee Stock Ownership Plan (ESOP): Transitioning ownership to employees.
  4. Initial Public Offering (IPO): Listing shares on a stock exchange to raise capital.
  5. Liquidation: Selling off assets and closing the business to repay debts.
  6. Management Buyout (MBO): Current management purchasing the business.
  7. Merger or Acquisition: Combining with or being acquired by another company.
  8. Acquihire: Selling the business primarily for the talent of its employees.

Here are five exit planning steps you need to take to maximize the value of your business and facilitate a smooth transition.

1. Start the planning process with a team of professionals

Exit planning is complex: you need experts in your corner.

Without a complete team, you might underestimate your company’s valuation and negotiate unfavorable terms during a merger or acquisition (M&A) transaction. An investment banker often assists in determining the accurate value of your business; a legal advisor ensures compliance with regulations and drafts solid agreements; an accountant helps you prepare detailed financial records; and an experienced exit planning advisor guides you through the entire process.

Emotional conflicts and poor financial planning may mar family succession. A family business advisor can help manage intergenerational dynamics; a legal expert ensures a smooth transfer of ownership; a financial planner assists in wealth preservation and management; and an exit planning advisor provides a structured approach.

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2. Account for your company structure during the planning process

Your company structure plays a pivotal role in your exit plan—involve partners or shareholders in the planning process. You may need to consider negotiating buyouts, ownership transfers, or identify potential buyers who can assume their stake in the business.

Under Section 1202, eligible C-Corporations or trusts can exclude a portion of the gain from the sale of qualified small business stock (QSBS) from federal taxation. When applied to stock transfers to family members, it may allow for intergenerational wealth transfer with reduced tax implications.

The type of exit strategy can trigger different structural stresses. Management and employee buyout (MBO) scenarios may lead to conflicts over ownership percentages, financing challenges, or disagreements on management roles; during an IPO, you might struggle with regulatory compliance, undervaluing shares, or effective investor communications.

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3. Utilize your lifetime exemption

Minimize your tax liability and maximize the value you pass on to your heirs.

Under current tax law, each individual has a lifetime exemption of $12.92 million for estate and gift tax purposes (or $25.84 million as a married couple) —though these amounts are set to sunset by the end of 2025.

In an M&A event, the sale of your business might involve a substantial amount of assets changing hands. Utilizing your lifetime exemption can enable you to transfer ownership to the acquiring entity or its stakeholders, such as shareholders or critical employees, while mitigating gift tax implications.

Likewise, when selling your stake to a partner or investor, leveraging your lifetime exemption can enhance the deal’s attractiveness. Strategically structure the transaction to include gifting provisions to reduce the financial burden on the acquiring party while meeting your estate planning objectives—particularly advantageous when the acquiring partner or investor wants to minimize their tax exposure.

4. Update Your Estate Plan

Provide clarity and protection for your assets during the exit process through your estate plan.

In the case of family succession, update your estate plan to ensure a seamless transfer of ownership while preserving family harmony — safeguard the family’s legacy, minimize conflicts, and maintain business continuity.

When contemplating liquidation, an estate plan outlines how assets and funds will be distributed among beneficiaries, creditors, and charitable causes—minimizing tax burdens and potential legal challenges while carrying out your wishes.

Are you prepared for your company’s IPO?

5. Cash Flow Strategies

Selling your business can provide a significant amount of cash, but it is essential to plan carefully to ensure financial security after the sale.

Managing cash flow in a bankruptcy scenario means satisfying creditors, reducing non-essential expenses, and optimizing working capital. Prioritize paying secured debts to protect valuable assets and negotiate repayment terms with unsecured creditors. Streamline operations to minimize cash outflows and ensure sufficient liquidity to cover legal fees and restructuring costs.

For an IPO, cash flow strategies focus on showcasing the company’s financial health to investors. Emphasize sustainable growth and profitability by managing costs, improving operating efficiency, and ensuring consistent positive cash flow. Adequate working capital is crucial to cover IPO-related expenses like underwriting fees and compliance costs.

In M&A, managing cash flow helps ensure a smooth transition and value realization. Assess the target company’s cash flow to understand its financial health and sustainability. Consider negotiation strategies to structure the deal to preserve your cash flow, such as earn-outs or staggered payments.

A holistic approach encompassing comprehensive team collaboration, strategic estate planning, and thoughtful cash flow strategies forms the bedrock of a successful business exit. Careful execution across these domains maximizes the value of your hard work and ensures a seamless transition into the next phase of your journey.

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