Exit Planning for Business Owners: Beginning with the End to Ensure a Smooth Transition

As an entrepreneur, you’re driven by passion, innovation, and the thrill of building something from the ground up. Exiting a business is a significant milestone that every business owner will eventually face, yet many entrepreneurs overlook the importance of strategic exit planning until it’s too late.

Whether you’re looking to retire, pursue new opportunities, or simply move on, having a well-thought-out exit strategy is essential for maximizing value and ensuring a smooth transition for all stakeholders involved.

Why Exit Planning Matters

  • Maximizing Value: Proper exit planning can allow business owners to maximize the value of their business by identifying areas for improvement, addressing any weaknesses, and enhancing its overall attractiveness to potential buyers or investors.
  • Financial Security: An effective exit plan helps to ensure that business owners can achieve their financial goals and secure their financial future post-exit. This may involve strategies such as minimizing taxes, diversifying assets, and optimizing the timing of the exit.
  • Protecting Legacy: For many entrepreneurs, their business represents a significant part of their legacy. Exit planning can help preserve this legacy by ensuring that the business continues to thrive after the owner’s departure, whether through succession planning, selling to a qualified buyer, or transitioning to a new leadership team.
  • Minimizing Disruption: Without proper planning, the exit process can be disruptive and chaotic, potentially leading to decreased morale among employees, customer uncertainty, and operational challenges. Exit planning helps minimize these disruptions by providing a clear roadmap for the transition period.

How to Plan Your Exit

  1. Start Early: Exit planning should ideally begin years before you actually intend to exit the business. Starting early can assist in allowing you to maximize value, address any deficiencies, and implement strategies that may take time to yield results.
  2. Set Clear Objectives: Define your personal and financial objectives for the exit, including your desired timeline, financial targets, and preferred exit strategy (e.g., sale to a third party, succession to family members, merger, or IPO).
  3. Assess Business Value: Conduct a thorough assessment of your business’s value, taking into account both tangible and intangible assets, financial performance, market conditions, and growth potential. Consider hiring a professional valuation expert to help ensure accuracy. Business valuation is important in the context of running the business, selling the business, and also certain tax planning strategies.
  4. Identify Potential Buyers or Successors: Determine who the potential buyers or successors for your business might be. This could include competitors, strategic investors, private equity firms, family members, or key employees. Cultivate relationships with these parties and assess their suitability to take over the business.
  5. Prepare Financial Documents: Compile all necessary financial documents, including financial statements, tax returns, contracts, and legal agreements. Having organized and up-to-date financial records will help streamline the due diligence process and instill confidence in potential buyers or investors.
  6. Address Legal and Tax Considerations: Seek advice from legal and tax professionals to understand the legal and tax implications of your exit strategy. This may involve structuring the deal to minimize tax liabilities, addressing any regulatory compliance issues, and ensuring that all necessary legal documents are in order. From a tax standpoint, consider strategies such as tax-deferred exchanges, installment sales, or qualified small business stock (QSBS) planning to minimize the tax impact of the exit. Additionally, explore opportunities for income tax deductions to offset a portion of the tax bite from a year of significant income (e.g., raising losses to offset gains, charitable contributions in the year of sale).
  7. Assemble a Strong Team: Surround yourself with talented individuals who share your vision and possess the skills necessary to navigate exits. Your business and personal life should operate as one coordinated effort where all parties communicate and nothing is lost in translation – Wealth Management Team, CPA, Legal, and M&A specialists.
  8. Cash Flow: Your Wealth Management Team can create a detailed cash flow and net worth model taking into account your liquid investment assets, real estate, spending, taxes, post-sale assumptions from the sale of a business, etc. Such an analysis is critical to understanding the economics behind the decisions you’re making (e.g., keep or sell the business, do I have enough to maintain lifestyle if the business is sold, what if I want to transfer wealth to the next generation to plan around the estate tax, etc.)
  9. Estate Planning Considerations: Integrate estate planning into your exit strategy to help ensure a smooth transfer of wealth and assets to your heirs or beneficiaries.
    • Every owner should have an updated estate plan (i.e., Will, Revocable Trust, Financial Power of Attorney, Medical Power of Attorney, and Health Care Directive). Business owners in particular face additional complexity in creating an estate plan. Their business represents potentially illiquid assets that are governed by separate operating agreements and can involve co-owners and other outside parties.
    • A business owner’s estate plan should work in concert with the businesses structure, long term goals and operating agreement. For instance, in some cases, an operating agreement will put restrictions on the transferability of a business interest. Business owners need to ensure that their estate planning documents do not call for an impermissible transfer that would create confusion and potential litigation. Also, a business owner might want to pass the value of a business to family who may or may not be involved in the day-to-day operations. It is important that an estate plan appropriately accounts for the differences amongst heirs’ involvement in the business in a way that the business owner feels is equitable while also allowing for uninterrupted business operations.
    • Should your buy-sell agreement be revisited? Typically found within a shareholder agreement (corporations), operating agreement (LLCs), or partnership agreement (partnerships), a buy-sell agreement governs the transfer of two or more owner’s interests in a closely held company should a triggering event occur. The most common events are death, disability, retirement, and divorce, but can also contemplate when a business relationship simply becomes unworkable. Unfortunately, many owners fail to prepare a thoughtfully considered and well-drafted buy-sell agreement when heads are level. This can result in wasted time, litigation, and considerable expense should a sudden/tense/emotional triggering event occur.
    • Estate plans may include implementing strategies with the goal of minimizing estate taxes. This could take the form of specific structures built into a client’s Will or Revocable Trust, or may involve creating certain irrevocable trusts during life and gifting shares of the business into said trust at a discount prior to sale.
  1. Develop a Contingency Plan: Prepare for unexpected events or changes in circumstances by developing a contingency plan. This may include identifying backup buyers or successors, establishing emergency funds, and putting in place mechanisms to mitigate risks.
  2. Communicate with Stakeholders: Keep key stakeholders, including employees, customers, suppliers, and investors, informed throughout the exit planning process. Transparency and open communication can help alleviate concerns and maintain trust during the transition period.

Exit planning is a crucial aspect of business ownership that should not be overlooked. By starting early, setting clear objectives, following a structured approach, and assembling the right team that includes Wealth Management, M&A, tax, and estate planning professionals, business owners can look to maximize value, ensure a smooth transition, and secure their financial future post-exit. Whether you’re planning to retire, pursue new ventures, or simply move on to the next chapter of your life, a well-executed exit plan can help you achieve your goals and leave behind a lasting legacy.

To learn more about how the Rockefeller Global Family Office can assist you, please reach out to request an introduction.

Investing involves risk, including risk of loss. Past performance is no guarantee of future results.

The information contained herein is provided for informational purposes only and is not intended, and should not be construed, as investment, accounting, tax or legal advice. Please consult your legal and tax advisors when considering this information. These materials do not constitute an offer to sell or a solicitation of an offer to buy interests in any Rockefeller Capital Management investment vehicle or product. This presentation may not be copied, reproduced or distributed without Rockefeller Capital Management’s prior written consent and may be used only where applicable and is not valid without a consultation with a representative of Rockefeller Capital Management.

Rockefeller Capital Management is the marketing name of Rockefeller Capital Management L.P. and its affiliates. Investment advisory, asset management and fiduciary activities are performed by the following affiliates of Rockefeller Capital Management: Rockefeller & Co. LLC, Rockefeller Trust Company, N.A., The Rockefeller Trust Company (Delaware) and Rockefeller Financial LLC, as the case may be. Rockefeller Financial LLC is a broker-dealer and investment adviser dually registered with the U.S. Securities and Exchange Commission (SEC); Member Financial Industry Regulatory Authority (FINRA), Securities Investor Protection Corporation (SIPC). These registrations and memberships in no way imply that the SEC has endorsed the entities, products or services discussed herein. Additional information is available upon request.

©2024 Rockefeller Capital Management. All rights reserved. Does not apply to sourced material. Products and services may be provided by various affiliates of Rockefeller Capital Management


Get on the list.
Dallas Innovates, every day. 

Sign up to keep your eye on what’s new and next in Dallas-Fort Worth, every day.

One quick signup, and you’re done.   
View previous emails.

R E A D   N E X T

  • calendar

    The Dallas Public Library's J. Erik Jonsson Central Library in downtown Dallas—one of America's largest—was built in 1982 across from Dallas City Hall, and many agree it could use an overhaul. That especially includes library officials and consultants they brought in for a report on the building's future, among other needed investments in the city's library system.

  • Amazon's "Sellers in Your Community" program lets entrepreneurs and small businesses share their stories with local leaders, creating more awareness and opportunity. Meet two Dallas-area founders who have big visions and philanthropic purpose.

  • From left: Ezi Negus, Okigwe Creations; Greer Christian, PureNRG Cycle; Awah Chai, Offworld Coffee; Kimberly Matthews, Holy Rollie Pastry Shop; and moderator Tarsha Hearns, The DEC Network. [Photo: The DEC Network]

    At the recent Entrepreneur Showcase in Dallas, four emerging startups were spotlighted alongside Biden Cabinet Member Isabella Casillas Guzman, who leads the Small Business Administration, and Mark Madrid, the driving force behind SBA's Office of Entrepreneurial Development. “I feel like I’ve just been to a TED talk with these entrepreneurs' words of wisdom,” Madrid said at the event powered by Dallas College and The DEC Network.

  • Gannett, a former chief marketing officer for "American Idol" and "So You Think You Can Dance,"  launched  Dallas-based Gannett.Partners to provide leadership coaching, operating advisory services, and strategic capital solutions. A native of Dallas who's lived in New York, he knows both cities well—and believes things are trending Dallas' way.

  • Entrepreneurs who want to take their small business to the next level can apply for Goldman Sachs 10,000 Small Businesses program. Free to participants, a 12-week program, facilitated in North Texas by Dallas College, focuses on business growth and provides education, a network of small business leaders and advisors, and access to capital. The deadline for the Spring 2024 cohort is September 27. "The best thing about the program will be the people that you know and all the information they share with you," said Edinson Arenas of Dallas-based Azteca Mexican Candy in a video. The national 10,000 Small Businesses…