Choosing The Right Time To Exit Your Business

Starting a business is often a long-held dream. Whether it is a childhood dream, a vision that began to form in college, or a more subtle fantasy that lingered in the back of your mind until just the right moment, you did not start it with thoughts of the end already in mind. However, knowing the right time to walk away is a critical component of owning an Arizona business. You might think that you will simply work until you retire and then give it to your children or sell it, but what if that plan does not work out? What if you receive an incredible offer years before anticipate retiring? What if your business underperforms or outperforms your expectations? When you are planning how and when to exit your business, there are many things to consider. A Harrison Law, PLLC business attorney may be able to assist you with creating your exit strategy and ensuring no important details are left out. Call (480) 320-2310 to schedule your consultation and review your legal options.

What Is an Exit Plan?

When people start a business, there are many plans they make. From planning a physical location for the business to when and how to hire the first employees, and so much more, business owners may sometimes feel like they are constantly planning. One plan they must eventually make is their exit plan. This is a plan for how and when they will exit their business. This is also known as business succession planning.

An exit plan is a comprehensive plan that outlines how the individual will transition out of their business when the time comes. This plan covers details such as who will take over, how much money the owner hopes to make from exiting the business, and other financial considerations or legal matters, according to the Arizona Business Brokers Association (AZBBA). Business owners should consider creating alternative exit plans to allow for different methods, times, and circumstances under which they may need to exit the business.

Five Times You May Need to Exit Your Business

While some individuals enjoy starting a business, helping it thrive, and then moving on to another business, there are also many individuals who have closely held their business as a dream and simply cannot imagine ever leaving it behind. Some people have decided to answer the question of “when will you exit your business?” with retirement. For some people, getting to choose when to exit their business does not happen. The decision is taken out of their hands by circumstances.

There are five circumstances under which an individual may need to leave their business that they may have little to no control over. These are death, disability, disagreement, divorce, and distress. Each of these circumstances, as well as retirement, may require different business exit strategies.

●     Death

When business owners think about transitioning out of the business, they often see themselves being present and fully involved in the process. If the business owner dies, someone else will need to handle it on their behalf. This means that a plan to exit your business should include information for if the owner has died, if there is not a complete plan solely for their death.

This plan should include details such as where to find important paperwork related to the business including financial information, whether the business can continue at its current operational capacity without the owner, and any contingency plans for business continuity in the owner’s absence. The plan should also outline any buy-sell agreements backed by life insurance that may exist with current business partners or if there is a will and trust that outlines transfer of ownership of the business.

●     Disability

Plenty of disabled individuals own thriving businesses and are thriving themselves. However, there are some disabilities that could prevent a business owner from continuing to work in their business because they can no longer communicate or for other reasons. Additionally, the disability does not have to be the owner’s. If a business owner becomes a caregiver to a suddenly disabled spouse, child, or other relative, they may no longer be able to invest as much time into their business, if any time at all.

An exit plan for disability may include details such as any temporary or permanent buy-sell agreements that may be triggered, what the business owner’s wishes for the business are if they are unable to communicate, and plans for what happens to the business if the owner is temporarily or permanently disabled or becomes a caregiver for another individual. The plan should also include information that allows key team members to continue to pay bills, manage operations, and work with vendors.

●     Disagreement

This exit plan will only apply to businesses with at least two owners. The unfortunate reality of a business partnership is that there can be disagreements. Many times, these disagreements are resolved with a compromise or other solution. However, for some business partnerships, there can be a disagreement that is too big and difficult to overcome. Whether one person gets their way and the other feels resentful, or there is simply no way to resolve the disagreement and still work together, coming up with a plan for exiting the business after this type of disagreement can be important to all partners feeling confident and secure in speaking their mind.

This plan should clearly define who leaves and what the terms are when they leave. Who leaves may be defined as naming a specific partner who leaves, regardless of the disagreement, or it may be defined as the partner with the smaller share, the partner who has the biggest difference from the original business vision or management style, or the partner who has made the least contributions. The plan should also dictate the terms, such as whether the departing partner must sell their shares to the other partners or can sell to a third party, and any other important terms the partners agree on. Due to the nature of this type of exit, it is crucial that businesses with multiple owners create an exit plan for this possibility as early as possible to avoid more conflict if the need to use this plan arises.

●     Divorce

A business owner’s spouse may have nothing to do with the business, have no clue how to run it, and have no interest in changing that. However, per ARS § 25-211, if the couple divorces, a spouse may be entitled to a share of the business’s value. If the business was established during the marriage, it is considered marital property. However, even if the business was formed before the marriage, any contributions the spouse made to the business that significantly increased the business’s value may still entitle them to a share of the business. However, even if the spouse is only entitled to a tiny share of the business, this could mean they receive a portion of the business or the owner has to buy them out.

A plan to exit your business in case of divorce should address issues such as whether ownership could be divided in a divorce and if the business has multiple owners, if there is a buy-sell agreement that requires an owner to sell their interests if they are getting divorced. The plan should also address how shares are valued in a divorce, how divorce impacts the business’s potential cash flow, and whether the business will be financially stressed due to greater demands on the owner’s personal income.

●     Distress

Businesses can end up in distress very quickly and unexpectedly. Lawsuits, pandemics, ransomware or system hacks are just a few threats a business may face that could put it in serious financial trouble. While businesses can sometimes recover from these and other threats, sometimes they do not. In some cases, the inability to recover is because no one knows what to do about the situation.

Exit plans for a business in distress should include contingencies for recovering from ransomware or system hacks, what to do if the business is sued, steps to take if the business is forced to close due to a pandemic or natural disaster, and how to deal with other circumstances that could place the company in distress. The plan should also include details for how to proceed if it is determined that the business cannot recover, such as whether to liquidate or try to sell to a larger company at a bargain price.

Factors to Consider When Choosing When to Exit Your Business

Ideally, when it is time to transition out of a business, it is by choice and under good circumstances. Choosing the right time to exit your business requires looking at a variety of factors and weighing them carefully. Additionally, business owners must also consider what a factor looks like at any given time, how it may change by their chosen exit date, and how potential changes may impact their exit strategy. While there are other factors to keep in mind, business owners may want to prioritize the following four factors.

●     Market Conditions

Market conditions will significantly influence the decision to exit your business. Market conditions impact prices, profits, wages, and incomes, and they can also impact a business valuation. Favorable conditions can give a business a higher valuation and thus, more profit for the owner when they sell. Unfavorable conditions may cause the owner to sell sooner than expected or make a quicker decision to minimize their losses.

●     Industry Changes

Many, if not all, industries experience change over time as economic trends change, technology advances, and environmental concerns are raised. Some businesses can more easily adapt to these changes than others. Their ability to adapt or not comes from a combination of things, such as money, ability to innovate, choosing the right strategies when making business decisions, and even what the company’s competitors are doing. If a business owner finds that their business struggles to keep up with industry changes, they may choose to exit their business sooner rather than later.

●     The Competitive Landscape

The competitive landscape can influence the decision about the right time to exit your business. While more competition may mean reduced profits, less competition may indicate a lack of demand for the product or service the business provides. Whether more or less competition exists, owners may decide that it is time to exit the business as a result. Considering the market share that the owner’s business has compared to their competitors, as well as pricing strategies and whether they can come up with a unique product that stands out from the competition should be part of the process of choosing the right time to exit your business.

●     Personal Life Changes

Whether an individual started their business at age 20 or age 40, they often have a vision of what life will look like going forward. Marriages, divorces, the births or deaths of children and other loved ones, relocations, illnesses, and other personal life changes can all have an impact on the business. Even if these life changes do not impact the business directly, they can impact a business owner’s decision to stay in the business or exit it in favor of other things.

Three Things to Consider Pre-Exit When Choosing Your Exit Date

While there are a plethora of things to consider when choosing the right time to exit your business, there are three things that business owners may wish to pay particular attention to over their years in the business so that their exit is most profitable to them, regardless of when it takes place.

●     Enhancing Business Value

Business income is important, but so is business value. There are many factors that go into valuing a business that a business owner has no control over, such as market circumstances and industry. All they can do is watch and wait for the right time with those factors. However, there are other things an owner can focus on that can increase the value of the business, such as focusing on systems, processes, recurring revenue, intellectual capital, investing, new equipment purchases, and even hiring and firing of individual employees. By focusing on these factors, business owners can enhance the business value, which ensures a higher price when they decide to sell.

When considering how to enhance business value, owners should also look at any value, profit, and wealth gaps between their own business and their competitors. These gaps can help them evaluate their business against their competitors to determine where they might make improvements that can help them close those gaps and become a more attractive option to potential buyers. Owners may also wish to consider determining how much money they would like to make upon exiting their business and using that as their goal when making business decisions to help ensure they make decisions that increase the business’s value.

●     Minimizing Taxes

Delayed planning can limit a business owner’s tax options, negatively affect the business’s value, and delay retirement plans. Proactive planning allows for a seamless sale and gives the business owner the option to take advantage of a variety of tax strategies. Asset and ownership transfers can be structured in different ways to take advantage of various benefits while minimizing tax implications. A business attorney at Harrison Law, PLLC may be able to offer guidance in maximizing your use of appropriate tax strategies for your business.

By planning early, business owners can confer with a business attorney, financial planner, and other experts to find out how to meet their tax goals. Whether they want to reduce estate taxes, defer capital gains, or reduce federal or Arizona state taxes, early planning can allow them to explore and find the right option to meet that goal while exiting their business.

●     Stakeholders and Family Considerations

Exiting a business can be an emotional and sensitive event not only for the business owner, but also for family, key stakeholders, and even employees if the business is small enough. To minimize business disruptions, allow ample time for training and setting expectations for the transition, and preserve relationships, business owners should involve family and key stakeholders in their business exit plan early. Consider going beyond sharing the details of the exit plan with them and allowing them to voice opinions or make suggestions. Even if the owner opts not to go along with those opinions or suggestions, simply hearing these important individuals out can assist with a smoother transition when the time comes.

How Could a Business Attorney Assist You?

Leaving your business may not have been something you thought about when you started. As time passes and you get older, your family grows, and other changes occur, you begin to realize that it will eventually happen, whether by your own choice or simply because you will die one day. By planning when you will exit your business, you take control of the situation and ensure that you get as much out of the experience as possible. If you are still trying to choose to transition out of your business, one of Harrison Law, PLLC’s business attorneys may be able to explore your options with you and help you determine which one may be right for you. Call (480) 320-2310 and schedule an appointment to discuss your business exit.

© 2024 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.