The exit of a founder or owner is one of the most consequential events in the lifecycle of any business. It deserves to be intentional and well planned.
The process is deeply personal and often emotional. It can follow different paths depending on the intended outcome — an IPO, a sale or a transfer of ownership interests in full or in part, within or outside the family.
Another key variable in how people leave their business is how they came into it — one of the most underestimated factors in understanding the exit journey.
Entrepreneurial founders often have a clear vision of their exit from the outset. Many welcome it and work toward it with a passion. Their decisions through the startup and growth phases — about borrowing money, raising capital, hiring talent and bringing in investors or partners — are made with an exit end-goal in mind.
It’s often a different mindset for those who grew a company that’s been in their family for generations. When these business owners contemplate an exit, even in the best of circumstances, their emotions can be a conflicting mix of excitement, relief, grief and maybe even fear over loss of control and self-esteem.
Regardless of how they get there, many of the same considerations go into planning an effective exit that realizes maximum value of the business. It’s a process that takes time to prepare for, both emotionally and financially.
Today’s economic challenges and uncertainty can make this process even harder. While deal activity has slowed considerably over the past two years, the number of founders and owners looking to exit their business remains high. The exodus isn’t solely because of baby boomers retiring, though that’s a part of it. Our 2022 Bank of America Study of Wealthy Americans — which surveyed 195 business owners with $3 million or more in investable assets, not including the value of their primary residence — found that nearly six in 10 plan to exit their companies within the next five years, including 71% of baby boomers and 48% of millennial owners looking to sell, transfer, gift or close their business in the near term.
A concerning revelation from our research, however, is that only one-third of business owners and founders have an exit strategy that’s well-documented and communicated to those who should know. A little more than one-quarter have a plan that consists only of a verbal agreement (14%) or simple, written memorandum (12%) outlining their wishes. Neither is sufficient to fully protect the value of the business and financial best interests of the owner or their families.
If you are ready to start the exit journey, here are five ways to make it intentional.
1. Integrate business and estate planning decisions.
I have yet to meet a founder or owner whose business and personal lives aren’t deeply intertwined. Yet it’s surprising how many do not integrate business succession planning and estate planning. An estate plan clarifies your wishes about the disposition of your assets after you’re gone or if you are unable to express those wishes yourself. These decisions may include setting up structures to hold or distribute your assets for purposes such as providing for your needs, distributing assets to heirs and making charitable gifts, while potentially reducing the burden of taxes and administration. The two planning processes complement each other and should be integrated.
The first step in integrating these is to make your personal planning lawyer, preferably one with experience with business owners, aware of how your business is organized. Also, consider sharing relevant business documents, such as entity agreements, structure charts, and documents like buy-sell agreements, and anything that reflects family involvement in the business. What the lawyer is looking out for is how matters of control, economic benefit, and management will play out, or flow through your estate, if you are no longer around.
2. Start preparing early.
Preparing for a smooth exit takes years, not months. It’s never too early to start the process.
If the goal is to keep the business in the family, it takes time to identify, nurture and develop future leaders. Succession planning is complex and can be further complicated by family dynamics, outside partners, existing management teams and a whole lot of unknowns. For example, is anyone in the family even interested?
Even if you are ready for a sale, the market may not be in a favorable cycle. While it may not be an ideal time to sell a business, it is a great time to plan to sell a business. Get your financial records in order, shore up credit and consider making investments that could put the company in a better position for a sale in due time.
Now is an excellent time to transfer or gift business interests that may be subject to a hefty estate tax. The federal estate tax exemption, currently at a high of $13.61 million per person or $27.22 million per married couple, will be cut roughly in half after the current law sunsets at the end of 2025 unless Congress passes legislation to extend it. Gifting or transferring business interests into a trust now may allow you to maximize the historically high exemption and to give away more as valuations rise because as the business grows, what you transferred in trust also grows but outside of your estate.
3. Know what you are selling: assets or stock?
The sale of a business may be the biggest tax event of an owner’s life. A common mistake sellers make is not realizing until after it’s too late that there are significant tax and liability implications, depending on how the deal is structured.
As far as taxes and liability exposure go, it all depends on what the owner sells — assets or stock — and what they receive in return — cash or stock. For example, the seller who does not fully appreciate the nuances of tax laws may be surprised to owe $40 million in taxes when they were expecting a $30 million tax bill, the difference being their decision to sell the company’s assets versus the stock of the company. Likewise, the owner who receives the stock of the buyer as payment may learn the hard way that they may also have ongoing liability exposure they were not expecting.
4. Plan your liquidity event, starting with an understanding of cash flow.
A privately held business typically represents an owner’s largest financial asset and source of wealth. Maybe you’ve been living off whatever salary or cash flow it generates for you. How might your lifestyle change without the business? What are you going to do if or when you come into a large amount of cash, and how do you make it start working for you? Managing liquid assets for cash flow and long-term preservation in line with your risk tolerance is often unfamiliar territory for business owners and founders whose largest asset has been largely illiquid.
5. Assemble your team of advisors and set a big table.
When you’re ready to act, your circle of trusted advisors will likely expand. Embrace the concept. There should be many seats at the table, each occupied by someone who brings distinct insight and expertise to the process. That might include your personal planning attorney and accountant as well as your business attorney and accountant; an investment banker to advise you on the deal and help you not leave money on the table; and a private banker or wealth manager who can help integrate your personal and financial goals into the process and make connections you may not already have. And don’t underestimate the emotional impact of exiting your business and the need for a sounding board — mentors, other business owners — before and after the transaction.
While there is an element of exit planning that involves preparing for the worst-case scenario, the best case for planning an exit is to make the most of a good thing: Position the company for maximum value and protect your family’s financial and emotional wellbeing.
Javier Romero is the head of Bank of America Private Bank’s Business Owner Center of Excellence.