Planning for a successful business exit is an essential part of business ownership. However, there are several elements that many business owners overlook when planning for a successful business exit:
- How to replace your income
- How to ensure your investments fit your long-term goals
- The role of taxes in selling the business and in post-business life
- How you can comfortably maintain your lifestyle after you exit
Today, we’ll examine how to address these important elements in your pre-exit planning, and how having a formal plan can help you avoid common pitfalls of post-business-exit life.
How Can You Replace Your Income Post-Exit?
After you sell your business, it’s likely that your income will change. The most obvious example of this change is that you may not draw a steady paycheck from your business because you are no longer working at it.
Ideally, you will have implemented strategies that allow your business to sell for enough money to position you for financial security in your post-exit life. But in order to create a safety net, it’s likely that you will need to implement strategies that allow you to use the money that you receive from the sale of your business wisely and in ways that don’t position you for financial peril.
In many cases, business owners will work with financial advisors, both pre- and post-sale, to invest the money that they receive from the sale of their business as a form of passive income. However, for business owners, creating useful financial plans for generational wealth tends to be more complex.
Remember: A successful business exit is defined as leaving the business with enough money so that you will never have to work again unless you want to. Handling what will likely be a large sum of money can be challenging and overwhelming for business owners, especially after going through the emotional toll of leaving the business itself.
Your Advisor Team could help you anticipate how much money you’ll need for financial security after the business sale. They can also help you invest your money to achieve whatever goals you may have after you exit your business. The financial plans that you use will depend on your unique circumstances. But it’s a good idea to coordinate with your Advisor Team both before and after you exit to ensure that your financial plans stay on track after you leave your business.
What If You Don’t Get Full Sale Price Upfront?
The scenario above is the most common for business owners to consider. They sell their business, they get their money, and they begin to move forward.
However, not all business exits take this route. This is especially true if you are considering transferring ownership of your business to an insider or family member.
When selling to an insider or family member, the buyer of your company often will not have the full amount to pay for full ownership of your business. In these cases, continuing positive business performance will likely play a crucial role in both ensuring a steady flow of income for you and eventually receiving the full amount for business ownership. A common strategy for these cases is leveraging promissory notes from the buyer.
Let’s say you wanted to sell to your business-active daughter. Your daughter doesn’t have the means to pay for ownership in full, so you may use promissory notes as a way for your daughter to pay you for full ownership over time. In this case, your daughter would use the business’s continuing profits to pay you back until you have received the full amount owed.
For this strategy to work properly, it’s important that you position the business to succeed with your daughter at the helm instead of you. This often means installing a next-level management team, codifying processes in writing, and otherwise ensuring that your daughter has enough success to eventually pay you full value for your business.
This is why it is so important to begin planning for your eventual business exit well before you are ready to exit. By giving yourself enough runway, you can better pursue your chosen Exit Path while protecting yourself against unexpected events that may require you to change your chosen Exit Path.
For example, if it turns out your business-active daughter is unable to maintain your company’s profitability in ways that position you for financial security, you could execute a plan that allows you to wrest ownership back and pivot to a different Exit Path that does allow you to achieve financial security.
How Do Investments Help You Achieve Your Post-Exit Goals?
An Advisor Team can help you find the appropriate investments and strategies for you to use to pursue your post-business-exit goals. They can also help you build your safety net for unexpected events that may occur after you exit your business.
A good example of this is the COVID pandemic. During the pandemic, the stock market would whipsaw and have dramatic effects on investments. When a business owner sells their business, invests a large chunk of the sale price in various investment vehicles, then watches the value of those investment vehicles drop precipitously, it can make them feel like they’ve done something wrong or that they have to make a big change to adjust to the new situation.
In this case, an Advisor Team can help the business owner keep a level head, look at the big-picture investment strategy, and better avoid making emotional financial decisions based on strange, uncommon, or personally upsetting situations.
What Role Do Taxes Play in Pre- and Post-Exit Planning?
Preparing for the tax consequences of selling your business is a multi-faceted challenge. You’ll need tax strategies that allow you to maximize how much goes in your pocket after you sell your business.
A common example is establishing your business as the proper entity to minimize your tax burdens. More specifically, if your company is incorporated as a C corporation, it’s possible that you will pay two taxes upon the sale of your business: one corporate rate for the actual sale and another for the proceeds that you receive from the sale.
To avoid this double tax, you would need to change your business to an S corporation, which can take several years to do, and which strongly implies that you would need to start that process several years before you’re ready to exit.
And outside of this common example, there are other tax scenarios that you need to consider as you approach your exit.
Let’s go back to our example of wanting to sell your business to your business-active daughter. Although it wouldn’t be possible for her to pay you the full sale price upfront, there can be positive tax consequences in using a promissory note strategy. For instance, if your daughter were to use the company’s profits toward paying you the full sale price over time, you may be able to leverage tax law so that you can defer any capital gains taxes.
And of course, after you sell your business, you may need to confront changes in your personal tax responsibilities, such as paying a higher tax rate due to entering a higher tax bracket.
An Advisor Team comprised of tax professionals and financial planning professionals can help you address the tax consequences of selling your business so you can position yourself to live the post-exit life you want to live. From minimizing the taxes you pay on the sale of your business to adjusting to any new tax responsibilities after you exit your business, an Advisor Team can help you navigate the complexities of taxes.
How Do You Maintain the Lifestyle You Want After Exiting?
It’s not uncommon for business owners to implement a strong Exit Plan, execute it, and then after exiting the business ask themselves, “Now what do I do?”
Pursuing the post-exit life you want often requires pre-business-exit planning. For many business owners, exiting the business is the beginning of the rest of their life. This after years or even decades of owning a business, which likely gave them a sense of purpose.
This often means that business owners not only need to have a plan for what they do in retirement but also a plan for how to fund the things that they want to do.
This mindset applies to the big things you want to do, such as travel the globe, leave your family with generational wealth, or commit to a legacy-building project. But it also applies to the day-to-day comforts you and your family already enjoy.
For example, business owners who sell their businesses generally have more time to indulge in the things they love. Having more time can mean doing it more, which often leads to more spending.
But this also applies to more mundane instances. For example, as you age, you will likely have more medical expenses. This is especially true if you’re part of the sandwich generation that is caring for aging parents and children at the same time.
The idea that you’ll spend less money after you retire is a trap. Fortunately, it’s a trap you can better avoid with a strong post-business-exit financial plan.
Conclusion
Whether you plan to exit your business very soon or years down the line, creating a personal financial plan in the context of selling your business is an important factor in achieving a successful post-retirement life. An Advisor Team can help you create a personal financial plan in parallel with your business plan to help you leverage as many resources as possible as you pursue a fulfilling post-exit life.
We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.