Before you open for business, consider your exit strategy. Such long-range planning may seem like overkill, but it can be invaluable to small business owners. How your business is incorporated (and how you are set up for tax purposes) will affect how easy it will be to leave your organization and move onto your next project. Here are three exit strategies to consider.

Exit Strategy 1: Wind It Down

You can close your doors relatively quickly, with a good bit of planning. Liquidating your business will require you to do some of the following:

• Inform employees, customers, vendors, and creditors of your plans to close
• Stop taking new clients or projects weeks, months, or years in advance of your close date
• Negotiate early termination of long-term projects or contracts
• Sell inventory and assets
• Pay outstanding debts using company funds or – if necessary – personal funds
• Distribute any remaining company assets or liabilities among co-owners
• Legally dissolve your business and cancel business licenses, registrations, and permits

Liquidating a business can be difficult from an operations standpoint, but also from a social standpoint. Your employees and customers may feel left in a lurch. Winding down your business may also not be the best strategy for you financially. When liquidating your business, the only value you extract from it is the value of your assets. Any goodwill you generated with your customer base will be lost.

Exit Strategy 2: Pass It Down

To ensure the value you built into the business survives your departure, consider passing the company to somebody you trust. Whether you select a family member, a friend, or your employees, start by getting an independent valuation. Valuations take all aspects of your business – both the tangible and intangible – into account before settling on a number. Here are two ways you can pass down your business:

Gifting it to a Family Member or Friend

Gifting your business to a family member can help with a smooth transition for the other owners and employees, and it may allow you to stay involved in the business even after you’re transitioned ownership. Two years ago, Congress nearly doubled the lifetime exemption making it easier for taxpayers to make tax-free gifts. In 2019, the lifetime exemption is $11.4 million (or $22.8 million for married taxpayers). If your business is valued at less than this amount, you can gift your ownership interest without tax consequences.

Distribute It to Your Employees

Employee stock ownership plans (ESOPs) are built for just this purpose. ESOPs are qualified retirement plans in the eyes of the IRS, but unlike 401(k)s or 403(b)s, ESOPs hold company stock rather than outside investments. When you are ready to leave, the ESOP will purchase your stock shares and pay you out in cash. The plan then holds onto those shares and distributes the stock in accordance with the plan document.

These plans can be costly to start, but plan expenses are deductible. ESOPs are great ways for existing employees to slowly take ownership, and your long-standing employees will be rewarded for their loyalty. Just keep in mind that ESOPs must be nondiscriminatory, so all employees enrolled in the plan will receive stock options. You cannot pick and choose who gets what shares.

Exit Strategy 3: Sell It

If neither liquidating nor gifting your business is ideal, you can sell it. You can sell it in the open market, or you can sell it privately, perhaps to somebody you know. It is very common for other owners to buy out an exiting shareholder. This keeps the organization running under similar ownership.

An independent valuation will be essential when you sell your business. If you choose your valuation firm wisely, they can even give you tips to optimize your business operations in the months leading up to the sale so you can ask for the highest selling price possible.

When selling to a third party, you give up all rights to how the business runs going forward. You may even find that your competitor purchases your business for its assets and then promptly shuts down operations. Keep this in mind before you enter a sale.

You may alternatively decide to sell your company on the public marketplace by issuing an Initial Public Offering (IPO). Going public will require your organization to comply with new accounting standards, issue new reports, and pay for costly attestations and audits, but it is an option.

Best Exit Strategy

Choose the exit strategy that works best for you. The option you select may not work for other businesses in your industry, and that’s okay. Exit strategies should be tailored to each individual business owner.

Landmark offers business advisory services and performs business valuations to prepare small business owners for their exit. If you’d like to learn more, reach out to us soon. We look forward to hearing from you.