Making the tough decision to exit the business you built is never easy, and determining the best way to step down is even more challenging. A business owner may choose to leave the company they created for many reasons. Regardless of the reasons for contemplating an exit or intentions for pursuing next steps, there are many vital factors a business owner should take into account to protect their assets and legacy. Creating a cohesive business exit plan can help you achieve your goals while protecting your business, reputation, finances, and future. Meet with an experienced Arizona business lawyer at Harrison Law, PLLC, by calling (480) 320-2310 to learn more about preparing a solid business exit strategy.
What Is a Business Exit Strategy?
Business owners devise exit strategies to prepare for the moment when they step down, typically by selling the organization, either to employees or to an outside party, or transferring it to family. A sound exit plan enumerates the steps necessary to navigate the transition efficiently, wrap up the business owner’s organizational involvement, and allow the business owner a smooth transfer into the next stage of life while the business they formerly managed continues to flourish in other hands.
Leaving Your Business Legacy
A family business succession exit strategy allows the company founder or owner to leave their position within the organization while ensuring it remains in the family. They may wish to have their children, siblings, or other family members take control at a pre-planned date upon departure. Strategies for transitioning may include mentorship for successors to prepare them for their future responsibilities and the steps to complete the transparent and positive transfer of ownership.
Advantages of Having an Exit Strategy for Your Business
Business exit strategies have many advantages, including ensuring that owners have the freedom to step down and reduce their stake in the business without disrupting operations or diminishing the company’s value. Successful business owners have the opportunity to make a significant profit for retirement; or, if the company is not doing well, they can minimize losses. Owners can prepare a method allowing them to determine departure timing to preserve their legacy and the company’s productivity, mission, and culture. More planning benefits include:
- An effective exit strategy leads to a smooth transition of control when the owner is ready to step down.
- A sound plan will increase the value and profitability of the business, making it more attractive to potential buyers.
- Planning provides the ability to plan for a lucrative retirement from selling the business to another organization, investors, or from dividends if passing ownership to family members.
- The owner can reduce leadership responsibilities slowly and step down from their position at the best time for the individual rather than the right time for the business because of unforeseen challenges.
- The business will continue operating after the transfer of leadership, carrying on the owner’s legacy for many years to come.
- The owner and management can make sound business decisions with intentional direction to maximize success.
Successful businesses rely on thorough, strategic planning from the organization’s inception to the exit plan. The blueprint for an exit should outline the preferred approach and document all steps to complete the sale or transfer smoothly and successfully.
Creating an Exit Strategy for Your Small to Medium Sized Businesses
Company owners should try not to think of an exit strategy as a short-term plan, as it could take several years or more to complete. An essential aspect of creating an exit strategy is allowing business owners to leave the company on their terms and when they are ready to step down. Some helpful tips for developing an effective procedure include:
- Research all available options to ensure they select the best one to help them reach their goals effectively.
- Prepare personal and professional finances for the transition into retirement or the next stage of their life.
- Obtain a professional business valuation to determine the company’s value.
- Consider the positive and negative potential outcomes and prepare for the best and worst-case scenarios to avoid costly and time-consuming surprises.
According to the United States Small Business Association, an accurate business appraisal completed by a professional should include the value of the real estate, intellectual property, customer information, brand presence, and future revenue projection. During a consultation, an estate planning and business attorney with Harrison Law, PLLC, may be able to review a more complete list of the benefits of a business exit strategy.
Four Exit Strategies for Leaving Your Business
There are four primary exit strategies for leaving a business. Identifying which is suitable to meet the owner’s goals and desires is the first step to creating a practical approach.
Passing the Business to Family Through a Business Legacy Exit Strategy
Many business owners open businesses with a desire to leave behind a business legacy by transferring the company to loved ones when they exit. A plan to pass the organization to family members could include years of mentorship and training to ensure the new company leader is fully prepared when the time comes.
The owner may need to allow time to determine which family member or members to mentor. They may also need to determine how to split ownership if their business succession plan includes leaving the company to multiple family members, as in the instance of a small business owner who wishes to divide ownership between their three children and an adult grandchild.
Selling the Company to a Third Party
Selling the business to an outside party is usually straightforward. In this scenario, the owner typically sells the entire operation to the highest bidder. This may be a competitor, another business, or an individual in an arm’s length transaction. This option is often ideal for businesses that are financially strong or, when selling to a competitor or other business, when the owner wishes to remain in the industry and take on a role with the newly merged business. According to the Arizona Department of Revenue, when selling an existing business to an outside party, the current owner must provide a Letter of Good Standing to prove they are not transferring outstanding taxes and debt to the new owner.
Transfer of Business Ownership to Employees
Entrepreneurs choosing to sell their businesses to employees may enjoy significant tax advantages. Another benefit is that the company can usually continue running as usual upon the owner’s departure. The executive can step down from their position on their own terms and still leave behind a fully functioning and profitable business and a lasting legacy.
To sell to employees, the owner first needs to create an Employee Stock Ownership Plan. This is a tax-qualified, defined employee benefit plan that can be set up to allow employees to purchase stock immediately upon the owner’s exit or over a set period of time. Due to its complexity, this may be a better option for medium to large businesses, rather than small businesses.
Liquidating the Organization and Closing It Down
Liquidating the organization and closing it down is usually the least preferred option, and business owners often use the strategy as a last resort when the company is struggling. Dissolving the company provides an opportunity to recover some value from its assets to pay off outstanding debt and minimize financial losses.
Call an Experienced Arizona Attorney Today
Building a new company and running a successful business requires careful planning, as does preparing to exit the business. Whether selling the organization to employees, an outside party, or transferring control to family, a thorough strategy is essential to complete a smooth transition and preserve your legacy. Taking the time necessary to prepare an appropriate departure plan offers many advantages, including maximizing profits for financial security after retirement. Schedule to meet with a seasoned Arizona business and estate planning attorney at Harrison Law, PLLC, at (480) 320-2310 for assistance in developing a sound business exit strategy.
© 2023 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved
This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.
