1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

Estate Planning for Business Owners - Learn the 6 Steps to Exiting Your Business

How to Leave Your Business Wisely

By

At some point every business owner will want to "exit" their business. Many times, however, the owner won't be able to leave voluntarily but will be forced to do so either due to incapacity or death. Without a proper business exit planning strategy, the involuntary loss of a key person can devastate a business by forcing liquidation during a chaotic time. Thus, proper exit planning should be an important part of a business owner's financial and estate plans. This type of planning, also commonly referred to as "business succession planning," consists of six important steps:

1. Setting Financial Goals

The first step in creating a viable business exit plan and strategy is to determine the owner's long term income needs and retirement goals. From this, the owner will be able to determine how much money the sale of the business must generate in order for the owner to retire comfortably.

2. Figuring Out the Current Value of the Business

Once the owner's long term financial goals have been determined, the next step to creating a viable business exit plan is to figure out the current fair market value of the business. This is done by analyzing the books of the business and comparing it's profits and losses with similar businesses in the area. The current value will then dictate whether or not Step Three - Building Business Value - is necessary and, in turn, the approximate time frame for the owner's exit from the business.

3. Building Business Value

If the value of the business is what the owner expected, then the owner's exit will most likely fall in line with the financial goals established in Step One. If, however, the value of the business is not as much as the owner expected, then the owner will need to stay active in the business for a longer period of time in order to bring the value up to the level that will allow the owner to exit the business comfortably. This will be the time for the owner to look at ways to increase the value of the business through expense and debt reduction, tax planning, and creative accounting.

4. Selling the Business

Once the owner's time frame for leaving the business has been determined, the owner should examine the pros and cons of selling the business to an outside third party or insiders such as family members or key employees. The type of purchaser will dictate future employee compensation and incentive packages and tax planning strategies for minimizing capital gains.

5. Creating a Contingency Plan

Even with a comprehensive business exit plan in place, things can go wrong. The owner could become physically or mentally disabled, a key employee could leave or die, or a fire or hurricance could completely destroy the business. Planning for these and other types of unexpected situations should be built right into every business exit plan. Things the owner should consider as part of a contigency plan include buy-sell agreements, key employee incentive programs, and purchasing business, disability, and life insurance.

6. Planning for Death

Once the owner has both a comprehensive business exit plan and a contingency strategy in place, the owner will be able to focus on their overall estate planning goals. Much of the estate plan may be tied directly to the sale of the business if it is to be sold to one or more family members, and this, in turn, will have a significant impact on the owner's estate plan. On the other hand, once the business is actually sold, the owner's financial position and holdings will change drastically from what they were while the owner still owned the business. Therefore, the owner must look at their estate plan at each and every phase of the business exit plan and update their estate plan accordingly.

©2014 About.com. All rights reserved.