Why Do I Need an Exit Strategy for My Business?
For most, the basic purpose of owning and operating a business is to make a profit. Not only is selling a business an opportunity to maximize your profits, it can sometimes be the most the most profitable business decision. Whether you are planning on selling your business within its first few years, first few decades, or never at all – it is always a good idea to have a comprehensive exit strategy, so the taxpaying business can plan for any situation that may arise down the road.
Most small business owners do not think about how they may wind down their business in the future. That lack of planning will typically result in a reduced valuation of the company at the time it is sold and a higher tax burden for the taxpaying business. That is why creating a comprehensive exit strategy is a smart business decision.
Is An Exit Strategy Really Necessary?
Here are a few of the most important reasons for why every business should have an exit strategy:
- Save on Taxes.
A well-thought-out exit strategy can save a business owner on taxes. For example, a business owner who makes the choice to liquidate his business over time can maximize his profits while also reducing the tax liability ever year by strategically funneling just enough profits so that he stays in the lower tax brackets. In comparison, if the business owner were to immediately liquidate his business, not only would he not be able to focus on maximizing his profits during this rapid period of winding down, the income derived from the sale would likely be taxed in a higher tax bracket.
For those planning to leave their business to their family, an exit strategy is also a valuable estate planning tool. By utilizing a popular entity choice such as a limited family partnership, a business owner can save taxes by both transferring his business in the most tax-efficient way and while also minimizing estate taxes and probate, an often laborious and time-consuming affair.
- Save on Investments.
A business with an exit strategy will also be able to save on investments. If a business owner is proactive about winding down her business, she can strategically invest in assets that will make the business more valuable in the long-term, while also avoiding any investments that are unnecessary or fail to deliver long-term value.
For example, if a business were to develop an exit strategy at the time of incorporation then the owner of the business has the opportunity to only invest in assets that deliver the maximum amount of value relative to his or her exit strategy. Not to overstate the obvious, but a business that is planning to be sold to a corporation within a few years will make different investment decisions than one who is planning on leaving a family business to his or her heirs.
- Maximize the valuation at the time of sale.
Last, an exit strategy will ensure that a business owner is maximizing the after-tax value of the business when he or she is ready to sell or pass the company onto the family. Maximizing the value of the business is just another way that an exit strategy maximizes the profit from the sale of the business. By operating a business with an eye towards maximizing the valuation of the business at the time of the sale, and thus maximize the after-tax profits, the business owner is empowered to make the best strategic decisions for his or her company. Instead of thinking about just “getting the job done,” a business owner can make decisions based on the ultimate endgame for the business.
While an exit strategy may seem like setting up a business for failure, in reality, it is more of a blueprint for success. If you have questions about structuring an exit strategy, schedule a consult with business transaction attorney Stephen Thienel today. Mr. Thienel has decades of experience assisting clients in assisting individuals with their business and estate planning needs throughout, Maryland, Virginia, and the District of Columbia.
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