Key Questions to Shape Your Exit Strategy

It’s hard to concentrate on an exit strategy when you are in the midst of operating your business, but just like death and taxes, a business exit is inevitable. Preparing ahead for your exit from business ownership can go a long way toward controlling the outcome. Planning can also control timing, although sometimes the circumstances of life—divorce, a death in the family, illness or disability—can accelerate even a planned exit.

When preparing ahead for a business exit, there are three critical questions every entrepreneur or shareholder should ask.

What will the tax implications be?

Business transfers can take place in one of three ways from a tax standpoint: a stock sale, an asset sale or a gift. Each has its own tax implications, which is why it’s important to seek the advice of a professional to review the implications of your planned strategy and offer advice on avoiding the largest tax implications. For example, a stock sale is considered a capital transaction and will leave you subject to the capital gains rules. An asset sale, on the other hand, may include not only capital gains, but various other ordinary income items as well. As you would expect, a gift will be subject to the gift and estate tax rules.

Who is the most likely buyer for the business?

Too often, business owners think about the exit process without putting much thought into finding a suitable buyer until they are ready to exit. But part of a good exit strategy includes identifying the most likely buyers. These could include:

  • Trusted and qualified manager
  • A current business partner
  • Family member or close friend
  • A competitor
  • Outside investor
  • Strategic investor

Your list may include more potential buyer categories. Once you’ve made your list, prioritize it. Planning ahead for a particular buyer or category of buyers allows you to position your company in a way that is likely to be appreciated and draw the best selling price.

What is the company’s true value?

It should come as no surprise to learn that most entrepreneurs have an inflated idea of their company’s actual worth. When you put your own hard work and intelligence into building something up, you are bound to believe it is worth considerably more than the market says it is. That’s why it’s important to keep in mind that regardless of how successful your business has been, it will always only be worth what a qualified buyer will pay for it.

To keep you more grounded, plan to have a professional business valuation completed on your company. A thorough appraisal will also allow you to better understand the factors impacting the value. A business valuation can also come in handy under other circumstances, providing a valuable point of reference to settle disagreements or disputes.

Developing an exit strategy can seem daunting. It’s easy to use the excuse that your exit strategy may need to be changed, but any exit strategy should be considered fluid. Plan your exit now, then prepare to make periodic reviews to account for any changes in tax laws, ownership status or competitive marketplace.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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