Exit Planning Tools for Business Owners

Exit Planning

A Cash Balance Plan May be a Great Tax- Reducing Benefit to A Business Owner

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Like most business owners, you’re likely exploring ways to strategically grow your revenue, increase profits, and minimize taxes. This is a common goal. As your cash flows increase, you may find yourself seeking ways to reduce your growing tax burden. Often, we explore sensible capital expenditures or business reinvestments that align with your strategic goals, which is a healthy exercise.

Growing the Business, Graph on top if ipad with eyeglassesBut sometimes, business owners could benefit from strategies to accumulate personal assets and reduce taxes. Depending on specific criteria, a Cash Balance Plan could be a powerful tool to achieve this objective and significantly reduce your tax burden.

What is a Cash Balance Plan? It’s an ERISA-based hybrid plan, a unique blend of a Defined Benefit Plan and a Money Purchase Plan. To plan participants, it resembles a Defined Contribution Plan, like a 401(k), but the IRS treats it as a Defined Benefit Plan. This plan operates alongside your 401(k)/ Profit Sharing Plan, offering an additional tax-deferral strategy for accumulating retirement assets.

Cash Balance Plans are effective tax-qualified retirement funding vehicles designed to help business owners aggressively accumulate retirement assets. They are beneficial if they have fallen behind in their retirement savings goals.

Like a Money Purchase Plan, a Cash Balance Plan has fixed contributions for each participant each year. Additionally, plan participants receive interest credits based on the established interest rate defined in the plan. Often viewed as a feature of flexibility, an increase or a decrease in the value of the investments within the plan does not affect the benefits promised to the participants. Gains and losses from the plan’s investments reduce or increase the plan sponsors contributions. The employer oversees the risk/reward design of the investments with the assistance of a professional investment advisor. A portfolio is designed for reasonable and relatively stable long-term growth.

Here are some itemized potential benefits for the business owner:

  1. Significant tax savings. The funds contributed to the plan in the first year of implementation are tax-deductible and considered an ” above-the-line” deduction. Also, employees with high earnings may be able to accelerate their savings. Administration fees may be tax-deductible.
     
  2. Protection of assets from creditors. The Cash Balance Plan is a tax-qualified ERISA plan, so it is protected from creditors.
     
  3. The plan can help attract and retain valued employees. Many younger employees may find an employer-funded retirement plan attractive.
     
  4. Cash Balance Plans can help business owners accelerate their retirement savings. In 2024, the potential contribution to a Cash balance plan can be $376,000 (for participants aged 66 -70 and in a top income bracket). See the table below for contribution limits and potential tax savings.
     

Below is a table that illustrates the maximum contribution for a 401(k) based on age, along with the profit sharing and potential contribution of the Cash Balance Plan. The CB contribution is based on age and income.
Source: Cash Balance 101: FuturePlan by Ascensus

Assets in the plan are not allocated into separate accounts for the participants, and the participants cannot direct the investments within the plan. The investments and contributions are in a pooled fund managed by the Trustees.

One of the unique features of a Cash Balance Plan is its age-discriminatory aspect. The older the business owner, the more income they can allocate to the plan pre-tax. Conversely, the younger the other plan participants (employees), the lower the contribution requirements are to the sponsor (owner). This makes it ideal for a company where the owner is considerably older than the other plan participants, especially if the owner is in their 50s or older.

Another ideal scenario for a Cash Balance Plan is when the owner’s or potential income is significantly higher than the other employees. This income disparity is a key factor in the plan’s effectiveness and should be considered when evaluating its suitability for your business. Some requirements must be met. The CB plan can be implemented if the annual non-discrimination requirements are satisfied. At a minimum, a CB plan is required to cover 40% of employees or 50 employees, whichever is less.

Some owners look for ways to increase their cash flow to help fund a Cash Balance Plan, such as R&D Tax Credits, Employee Retention Credits, etc. However, these need to be vetted by a tax credit specialist, and current laws and eligibility must be followed carefully. But suppose the conditions are suitable for the owner. In that case, they are interested in saving on taxes and accelerating retirement savings, and it helps retain employees; it might make sense to perform an employee census-based analysis.

Steven Zeller is a Certified Business Exit Planner, Certified Financial Planner, Accredited Investment Fiduciary, and Co-Founder and President of Zeller Kern Wealth Advisors. He advises business owners with developing exit plans, increasing business value, employee retention, executive bonus plans, etc. He can be reached at szeller@zellerkern.com

Owning Change: Continuity Planning for Businesses in Ownership Transitions

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Ownership changes are critical moments in the life of any business. Whether due to the untimely death of an owner, the departure of a sole owner, or the exit of a co-owner in a multi-owner business, these transitions present unique challenges that require thoughtful planning. Effective continuity planning can help ensure that a business not only survives but thrives through these transitions.

Continuity Planning Following the Death of an Owner

The sudden death of an owner can be a devastating event for any business, particularly for small to medium-sized enterprises (SMEs). Without a well-thought-out continuity plan, the business may face significant disruption, which could lead to operational paralysis, loss of key clients, and eventual closure. A few key considerations for this scenario include:

Succession Planning: One of the most critical components of a continuity plan in this scenario is a detailed succession plan. This plan should identify who will take over the owner’s responsibilities and how the transition will occur.

Business Continuity Instructions (BCI): BCIs provide the deceased owner’s family and key employees with a roadmap for managing the business in the immediate aftermath of the owner’s death. These instructions should include contact information for trusted advisors, detailed plans for continuing operations, and clear guidance on the eventual transfer of ownership.

Financial Considerations: Life insurance policies can provide the necessary funds to maintain operations, pay off debts, and support the transition to new ownership. These funds can also be used to finance a Stay Bonus Plan to retain key employees during the transition.

Continuity Planning for Owner Departure in a Sole Proprietorship

In sole proprietorships, the departure of the owner, whether due to retirement, sale of the business, or other reasons, poses a significant challenge. Unlike multi-owner businesses, there is no one to automatically take over, making advance planning crucial. Important steps in this scenario include:

Identifying a Successor: For sole proprietors, it’s vital to identify and prepare a successor well before departure. This could be a family member, a key employee, or an external buyer. The process of grooming a successor should involve training and gradually increasing their responsibilities to ensure they are ready to take over when the time comes.

Business Valuation: Regular business valuation is essential to ensure that the owner receives fair compensation upon exiting the business. An accurate valuation also helps potential successors or buyers understand the financial health of the business and its growth prospects.

Transition Planning: A comprehensive transition plan should outline the steps for transferring ownership, including legal and financial considerations. This plan should be shared with all stakeholders to ensure a smooth handover and to minimize disruption to business operations.

Continuity Planning for Departure of One Owner in a Co-Owned Business

In businesses with multiple owners, the departure of one owner can create tension and uncertainty, particularly if the remaining owners are unprepared. A well-drafted Buy-Sell Agreement is essential in these situations to govern the transition and ensure fairness to all parties.

Buy-Sell Agreement: This agreement should clearly define the terms under which an owner can exit the business, including how their share will be valued and purchased by the remaining owners. The agreement should also outline the payment terms and any financing arrangements necessary to complete the buyout.

Valuation Methods: The Buy-Sell Agreement should specify an independent and fair valuation method for the departing owner’s share of the business. This helps prevent disputes and ensures that the process is transparent and equitable.

Impact on Business Operations: The departure of a co-owner may require a reassessment of the business’s strategic direction, particularly if the departing owner played a significant role in decision-making. It’s important for the remaining owners to communicate clearly with employees, clients, and other stakeholders to maintain confidence and stability during the transition.

Common Considerations

While each ownership transition scenario presents unique challenges, several common themes emerge:

Proactive Planning: Whether dealing with the death of an owner, the departure of a sole proprietor, or the exit of a co-owner, proactive planning is crucial. Waiting until a crisis occurs can lead to hasty decisions that may jeopardize the future of the business.

Legal and Financial Preparedness: In all scenarios, having the right legal and financial structures in place—such as succession plans, Buy-Sell Agreements, and life insurance policies—can mitigate risks and ensure a smoother transition.

Communication: Clear and consistent communication with all stakeholders is vital. Whether it’s sharing Business Continuity Instructions with family members or discussing the terms of a Buy-Sell Agreement with co-owners, transparency helps prevent misunderstandings and builds trust.

Ownership transitions are inevitable, but with the right continuity planning, businesses can navigate these changes successfully. By understanding the unique challenges of each scenario and taking proactive steps to address them, business owners and financial managers can ensure that their companies remain resilient and poised for continued success. Contact an exit planning consultant to develop a continuity plan that works for your individual business needs.

 

David Jean is the Director of Altus Exit Strategies and a Principal at Albin, Randall & Bennett, where he is also the Practice Leader of the Succession Planning, Business Advisory, and Construction & Real Estate Services Teams. David works with business owners who want to improve their business’s value before they sell through the Seven-Step Exit Planning Preparation™ process. He has worked with companies from $5 million to $50 million in revenue across a range of industries. He can be reached at djean@arbcpa.com.

My Interview with Jerry West on Management

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I once had the thrill of interviewing Jerry West on management. He was “The Logo” for the NBA, although back then they didn’t advertise him as such. Only the Laker followers knew for sure.

In 1989 the “Showtime” Lakers were coming off back-to-back championships.  Pat Riley was a year away from his first of three Coach of the Year awards. Jerry was the GM. Many people don’t know this, but starting when Jerry West was drafted in 1960 until he stepped out of the GM role in 2002, the Lakers only missed the playoffs twice. Those seasons (74-75 and 75-76) were the only two seasons out of 42 that West was not on the Laker payroll.

In 1989 I was enrolled in Pepperdine’s Executive MBA program. Our class assignment was to interview a top executive with whom we had no previous relationship or introduction about his management style.

Mr. West Returns the Call

I was an avid Laker fan, and I thought “He can only say no.” So I called the Forum, asked for West’s office, and left him a voicemail. A few hours later our receptionist called me and said “One of your friends is goofing around on the phone. He says he’s Jerry West.” Obviously, I took the call.

We met in his office underneath the stands in the Forum. It may have been 12 x 12 feet, but the magnetic boards lining the wall made it seem much smaller. Each board had an NBA team’s name on top, and magnetic placards for every player currently on that team.

I asked Jerry about how he approached the management of the Lakers. He gestured to the boards. “My job as General Manager is to put the best team on the floor that I can. I look at these boards every day and think who might be better on the Lakers? Then I look at other teams and think who they might have that will convince the team with the player I want to give him up.”

He went on to say that he was sure that business executives weren’t as singularly focused as he was. He thought about the Lakers from the moment he woke until going to sleep at night. I didn’t try to convince him that he matched the profile of many small business owners.

Jerry West on Management

As a manager, Jerry said that he believed that if you hired someone to do a job, then you needed to step back and let them do it. Pat Riley was a broadcaster with no coaching background. Jerry said that the problem with experienced coaches is that they had already been fired once. West took a flyer on Riley, but to appease the media he agreed to sit on the bench to lend advice.

“It was crazy. Riley had no idea what he was doing. He’d call to put guys in the game that we had cut the week before or to sub in guys who were already on the floor. I lasted about three games on the bench. I had to go to my office and let him learn on his own. The alternative was that I’d kill him.”

One poignant moment was when he discussed his family. I can’t imagine the burden being in the public eye brought with it. He talked about his children being bullied on the playground because the team was on a losing streak. Even worse was having his wife accosted in the supermarket aisle by a fan who was incensed over a trade.

One of his greatest tips was when we discussed keeping things in perspective. He showed me two file folders in his desk drawer. “One of these has the most complimentary of the letters I get when the team is doing well. They tell me I’m a genius. The other folder is the worst letters I get when the team is doing poorly. You can guess what they think of me.”

“Whenever we are on a streak, good or bad, I pull one of the letters from the file when we were doing the opposite. It reminds me that it wasn’t always the way it is today, and it will swing back sooner or later.”

Looking to the future

I wasn’t supposed to discuss the Lakers, but the fan in me couldn’t help it. Jerry had just drafted a guy from Yugoslavia that no one had heard of. This was well before European players dominated the top draft picks. I had to ask him about his choice.

“Wait until you see him,” West said. “Seven feet tall and he can pass the ball like Magic.”

He became the starting Laker center for the next seven years. Then Jerry West traded Vlade Divac to the Charlotte Hornets on draft night of 1996 to get the 13th pick, a teenager named Kobe Bryant.

Always looking at those boards.

We’ll miss you, Jerry.

 

 
John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Seize The Moment: Strategically Timing Your Retirement When Selling Your Business

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Time is money finance concept with old vintage clocks, dollar bills and magnifying glass.

Imagine standing at the edge of a cliff, ready to take a leap into a new chapter of your life. That’s retirement. Now, picture this adventure interwoven with the sale of your business. Exciting, right? Just like any daring journey, timing is everything.

Let’s talk about finding that perfect moment to embark on your retirement while selling your business. It’s not just about calendars and clocks; it’s about aligning the stars to make the most of your hard-earned efforts.

First off, consider the market trends. Are you in a booming phase where your business value is at its peak? Capitalise on that surge to secure a comfortable retirement fund. On the flip side, if the market is shaky, give it time to rebound before exiting.

But it’s not just external factors — your internal readiness matters too. Ask yourself: Have you achieved your personal and financial goals? Are you emotionally prepared to let go of the business you’ve nurtured? Your gut feeling often knows best.

Also, think about your successor. Is there someone you’ve been grooming to take the reins? Timing your retirement when your successor is ready can ensure a smooth transition for both you and your business.

Let’s talk about legacy. How do you envision your business carrying on without you? Timing your retirement allows you to leave behind a legacy that echoes your values and vision. It’s like passing the baton in a relay race — a moment of seamless exchange ensuring the race continues strong.

In the end, timing your retirement while selling your business is like orchestrating a symphony — a blend of external harmony and internal rhythm. When you feel that crescendo building, that’s when you know it’s time to take that leap.

Are You Financially Ready to Exit Your Business Even if it Happened Tomorrow?

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Does Your Current Situation Have You Financially Ready to Exit Your Business?

Setting the Scene: The Importance of Financial Preparedness for Exiting a Business

Exiting a business is a significant decision that requires careful consideration, particularly regarding financial readiness. Whether you’re considering retirement, pursuing new ventures, or simply ready to move on, being financially prepared is crucial for a smooth transition.

Understanding the Decision: Factors to Consider Before Exiting Your Business

Before making the leap, it’s essential to understand the various factors that influence your decision to exit your business. From personal goals to market conditions, several considerations can impact your readiness to move on from your business venture.

Assessing Your Financial Readiness:
Evaluating Your Current Financial Situation: Income, Expenses, and Assets

Start by taking stock of your current financial situation. Evaluate your income streams, including revenue from the business, personal investments, and other sources. Consider your monthly expenses and assess your assets, including both business and personal holdings.

Estimating Your Business’s Value: Determining Its Market Worth

Determining the value of your business is a critical step in assessing your financial readiness to exit. Consider consulting with a business valuation expert to get an accurate estimate based on various factors, including revenue, assets, market trends, and industry standards.

Analyzing Cash Flow: Ensuring Stability Post-Exit

Cash flow analysis is essential to ensure financial stability post-exit. Evaluate your business’s cash flow projections to understand how it will sustain your lifestyle and cover expenses after you’ve left the business. Consider factors such as ongoing revenue streams, debt obligations, and potential changes in expenses.

Understanding Exit Options:
Exploring Different Exit Strategies: Sale, Succession, or Closure

There are several exit strategies to consider, including selling the business, passing it on to family members or employees through succession, or simply closing the doors. Each option has its pros and cons, depending on your personal and financial goals, as well as the state of your business.

Pros and Cons of Each Option: Weighing the Benefits and Challenges

Take the time to weigh the advantages and disadvantages of each exit strategy. Selling the business may offer a significant financial windfall but requires finding the right buyer. Succession can preserve your legacy but may come with complexities in transition. Closure provides a clean break but may not maximize financial returns.

Considering Timing: Is Now the Right Time to Exit?

Timing is crucial when it comes to exiting your business. Consider factors such as market conditions, industry trends, personal readiness, and potential tax implications. Assess whether the current timing aligns with your financial goals and objectives.

Financial Planning for Exit:
Creating a Financial Exit Plan: Setting Clear Goals and Objectives

Develop a comprehensive financial exit plan that outlines your goals and objectives for exiting the business. Define what financial success looks like for you and establish clear milestones and timelines for achieving your objectives.

Building a Contingency Fund: Preparing for Unexpected Expenses

Prepare for unexpected expenses by building a contingency fund. Set aside a portion of your assets to cover unforeseen costs or emergencies that may arise during the exit process. Having a financial safety net in place can provide peace of mind and ensure a smoother transition.

Engaging Financial Advisors: Seeking Professional Guidance for Exit Planning

Consider seeking guidance from financial advisors who specialize in exit planning. An experienced advisor can help you navigate complex financial decisions, optimize tax strategies, and maximize the value of your business. Their expertise can provide valuable insights and support throughout the exit process.

Maximizing Business Value:
Increasing Profitability: Strategies to Boost Revenue and Reduce Costs

Take proactive steps to increase the profitability of your business before exiting. Implement strategies to boost revenue, such as expanding market reach, launching new products or services, or improving customer retention. Similarly, focus on reducing costs and improving operational efficiency to enhance overall profitability.

Enhancing Business Operations: Improving Efficiency and Productivity

Streamline business operations to maximize efficiency and productivity. Identify areas for improvement, such as workflow processes, technology integration, and resource allocation. By optimizing operations, you can increase the value of your business and make it more attractive to potential buyers or successors.

Investing in Growth Opportunities: Expanding Market Reach and Customer Base

Explore growth opportunities to expand your business’s market reach and customer base. Consider diversifying into new markets, partnering with complementary businesses, or investing in marketing and advertising efforts. By positioning your business for growth, you can enhance its value and appeal to potential buyers or successors.

Managing Debt and Liabilities:
Assessing Debt Obligations: Understanding Your Business’s Debt Structure

Assess your business’s debt obligations to understand its financial liabilities. Review outstanding loans, lines of credit, and other forms of debt, including repayment terms and interest rates. Understanding your debt structure is essential for developing a plan to manage or repay debts before exiting the business.

Developing a Debt Repayment Plan: Prioritizing Payments and Negotiating Terms

Develop a debt repayment plan to address outstanding obligations before exiting the business. Prioritize debt payments based on interest rates, maturity dates, and creditor requirements. Explore options for negotiating repayment terms or consolidating debts to improve your financial position.

Addressing Legal and Financial Liabilities: Mitigating Risks Before Exit

Identify and address any legal or financial liabilities that may pose risks to your business or personal assets. Review contracts, leases, and agreements to ensure compliance and mitigate potential liabilities. Seek legal advice to address any outstanding legal issues or liabilities before finalizing your exit plans.

Preparing Personal Finances:
Separating Personal and Business Finances: Organizing Accounts and Assets

Separate your personal and business finances to streamline your financial affairs. Organize accounts, assets, and expenses into distinct categories to simplify financial management and reporting. Establish clear boundaries between personal and business transactions to avoid confusion and potential legal or tax issues.

Building Personal Savings: Establishing a Safety Net for Post-Exit Life

Build personal savings to establish a financial safety net for post-exit life. Set aside funds in savings accounts, retirement plans, or investment portfolios to cover living expenses, healthcare costs, and other financial needs. Having a robust savings cushion can provide financial security and peace of mind during the transition period.

Planning for Retirement: Securing Financial Stability Beyond Business Ownership

Plan for retirement to ensure long-term financial stability beyond business ownership. Evaluate retirement savings options, such as IRAs, 401(k)s, or pensions, and consider how they fit into your overall financial plan. Develop a retirement income strategy that aligns with your lifestyle goals and objectives for retirement.

Tax Implications of Exit:
Understanding Tax Consequences: Capital Gains, Income Tax, and Other Considerations

Understand the tax implications of exiting your business, including capital gains tax, income tax, and other relevant taxes. Consult with tax professionals to assess your tax liability and explore strategies to minimize taxes legally. Consider timing your exit to optimize tax outcomes and maximize financial returns.

Utilizing Tax Strategies: Maximizing Deductions and Credits Before Exit

Explore tax strategies to maximize deductions and credits before exiting your business. Take advantage of available tax incentives, such as deductions for business expenses, retirement contributions, or capital investments. Implementing tax-efficient strategies can help reduce your overall tax burden and preserve more of your wealth.

Consulting Tax Professionals: Navigating Complex Tax Laws and Regulations

Seek guidance from tax professionals who specialize in business exits and transitions. A qualified tax advisor can help you navigate complex tax laws and regulations, interpret tax implications, and develop tax-efficient exit strategies. Their expertise can ensure compliance with tax requirements and optimize your financial outcomes.

Exiting with Confidence:
Finalizing Your Exit Plan: Documenting Agreements and Contracts

Finalize your exit plan by documenting agreements and contracts that outline the terms and conditions of your departure. Work with legal advisors to draft legally binding documents, such as sale agreements, succession plans, or dissolution agreements. Ensure all parties involved understand their rights and responsibilities.

Communicating with Stakeholders: Keeping Employees, Customers, and Partners Informed

Communicate openly and transparently with stakeholders about your exit plans. Keep employees, customers, suppliers, and partners informed about the transition process and how it may impact them. Address any concerns or questions promptly and reassure stakeholders of your commitment to a smooth transition.

Celebrating Achievements: Reflecting on Your Business Journey Before Moving On

Take time to reflect on your achievements and milestones before moving on from your business. Celebrate your successes and the hard work that went into building and growing your enterprise. Express gratitude to employees, customers, and supporters who contributed to your journey. Celebrating achievements can provide closure and pave the way for new beginnings.

Conclusion:
Taking the Leap: Are You Financially Ready to Exit Your Business?

Exiting a business is a significant decision that requires careful consideration and financial preparedness. By evaluating your financial readiness, understanding exit options, and planning strategically, you can confidently take the leap into the next chapter of your entrepreneurial journey.

Moving Forward with Confidence: Embracing the Next Chapter of Your Entrepreneurial Journey

As you embark on the journey of exiting your business, remember to move forward with confidence and optimism. Embrace the opportunities that lie ahead and leverage your experience and expertise to pursue new ventures or enjoy well-deserved retirement. With careful planning and preparation, you can navigate the transition successfully and embark on a new entrepreneurial adventure with confidence.

Reposted with permission of the author, Tara L. Groody, Executive Assistant/Operations Specialist for Brett Andrews and Fortress Business Advisory.

Brett Andrews, CWS, CExP, CEPA, is the President of Fortress Business Advisory. He has worked with individuals and businesses managing their assets since 1998. His mission is to help clients reach their goals while managing risk in their total financial situation. To accomplish this, Brett has combined modern financial planning techniques with technical, quantitative, and behavioral analysis to achieve a truly unique and dynamic approach to total wealth management.