Exit Planning Tools for Business Owners

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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.

How to Separate Yourself From Your Business – Why It’s So Important

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happy woman working at computer When you run your own business, oftentimes one of the most confusing aspects of the job, especially if you are new to the experience, is understanding how to separate yourself from your business. And this issue can show up in so many ways, from achieving a work/life balance and managing your time to how you get paid and even how much taxes you owe.

With this in mind, here we will offer a big-picture overview of this issue, and in future articles, we’ll drill down to some of the finer details of keeping your business and personal assets separate. Although it might not seem overly complicated or important, separating yourself from your business is a serious issue for every business owner.

You & Your Business Are Separate Entities

The first thing to keep in mind is this: you are not your business, you are not your heart project, your are not your work in the world or even the services you offer. Your business, heart project, work, service, and/or product may feel like it’s one and the same as you, or even as if it’s your baby. But one day, just like the little ones you give birth to, you may want your business to grow up and go on to live on its own without you. Or you may not want that—it’s all a matter of preference, and your decision on this point may even evolve over time.

Either way, this is a good thing to start thinking about now. Do you want what you are creating to live beyond you? If so, you’ll need to start thinking about it as an evolutionary entity that can grow separate from you. And whether you want it to live on beyond you or not, you want it to exist separately from you, because as you’ll learn, there are major tax and asset protection benefits for you by doing this properly.

Owning A Business vs. Being An Employee

To add perspective, let’s contrast what it’s like to run your own business with what happens when you are working as an employee.

The Employee Experience:

As an employee, you get paid via a paycheck, with taxes taken out and a W-2 issued to you at the end of the year. In this case, you and your money-earning vehicle are essentially one and the same.

You earn money, and you pay taxes on that money in the form of income taxes and payroll taxes. As an employee, what comes to you every pay period via your paycheck is yours to put into your personal financial accounts, so you can pay your bills, save, or invest. In that context, you are getting taxed on every dollar you earn.

There are some ways that you can save money tax free as an employee, such as by directing some of your pay into a 401(k), an IRA, or even a Health Savings Account, provided your employer offers such benefits. But for the most part, you are paying payroll taxes and income taxes—which are two separate types of taxes—on every dollar you make.

The Business Owner Experience:

In contrast, when you are earning money through a business entity that is under your control, money comes into your business, goes into your business accounts, and is first used to pay business expenses, which are deductible expenses to your business. When you deduct business expenses from the income of your business, you do not pay income taxes on that income. In this way, you can think of business expenses as a government-subsidized expenditure.

Here’s what I mean: if you can purchase a computer through your business and use it for business, you are paying for that computer with pre-tax dollars, which could save you up to 40% (or more depending on your state) on the cost of the computer, versus if you were to purchase that same computer with after-tax dollars. But this only works if you treat your business like a business, and properly separate your personal and business accounts.

To keep your business and personal expenses separate, your business entity needs its own bank account, its own credit cards, and it needs to pay you. You then always pay your personal expenses out of your personal accounts, never your business accounts. Whatever your business pays you will be subject to income tax and possibly payroll tax as well, though there are ways to significantly reduce your payroll tax obligation by choosing the right way to structure your business entity. Be sure to talk with us regarding how to structure your business for maximum tax savings, if you have not already gotten great guidance on that front.

To the extent that your business earns more money than what’s required to cover your basic needs, you may want to consider investing to hire experienced support staff (especially a skilled bookkeeper and administrative support) to free up your time and allow you to focus on generating more revenue, better serving your clients or customers, and growing your operation. Or you may choose to invest that money in additional education or training for yourself, so you can increase the value (and price) of your services. If you have excess cash flow, you’ll also want to know how to structure your profits, so you pay the smallest amount in taxes legally possible.

Don’t Mix Personal & Business Finances

Whatever you do, do not simply have one bank account that you pay both your personal and business expenses from, or you are going to get seriously confused, and you could even end up losing money or getting into legal or tax trouble, depending on your company’s entity structure.

If you have already paid business expenses out of a personal account, or by using personal credit cards, keep careful track and document exactly how much you paid out from those accounts to your business. This payment will either be an investment in your business that you will want to track for the future, or it will be a personal loan to your business that you will want to eventually have paid back.

Talk with your CPA regarding how best to structure investments in or as loans to your business, and then we can help you properly document your decisions. Or if you need strategic support on this issue, contact us, and ask about a LIFT Business Breakthrough Session, and we’ll look at all of your legal, insurance, financial, and tax strategic decisions together.

When you work with us, as your Family Business Lawyer™, we offer a number of systems and processes that make keeping your personal and business finances separate a snap. Not only that, but we offer additional services that make separating yourself from your business as easy and convenient as possible. Reach out to us to learn more.

Get Clear On Your Actual Financial Needs & Goals

One of the best ways to effectively manage your business and personal finances is to first get clear on what you need your business to pay you at a base level, so you can pay all of your bills and other personal expenses as well as meet your personal time and money goals. To get clear on this, we use a process called Money Mapping. If you haven’t worked with us on this yet, now is the time to finally get a solid understanding of how much money you actually need to reach your goals, rather than guessing or worrying about how much you need to earn to stay afloat.

We’ve Got Your Back

When it comes to separating yourself from your business and managing all of the different aspects involved with this process, you can count on us to provide you with the trusted support and guidance. With our help, you’ll learn how to do this in a way that not only ensures you are doing it right, but that actually adds value to your company and generates increased revenue. Sit down with us, your Family Business Lawyer™ to learn about all of the different ways we can support you in this area. Schedule your visit today.

This article is a service of Todd Jarvis, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business.

What’s Your Purpose in Retirement?

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beach with blue hammocksRetirement can be an exciting milestone. It’s also a major lifestyle change. Oftentimes, your daily workday tasks (professionally or if you run your own business) will likely no longer exist.

Transitioning into retirement for some is an easy process. Perhaps their profession is not their absolute passion, and they always had other pursuits and hobbies they are ready to explore once exiting from their day job. But for others, their profession or business is their passion. They put all their time and energy into it and are dedicated to their profession for many years. Now suddenly, retirement is on the horizon and work is coming to an end. Alternatively, some people have it in their blood to consistently be achieving something, striving to make an impact and difference.

Whichever the case for you, a meaningful life with purpose is a healthy human condition for life fulfillment and longevity. This perspective has been around for generations. Teddy Roosevelt wrote about it in his book, “The Strenuous Life,” written in 1899. To reference his perspective, here is a quote addressing how to live a fulfilling life:

“I wish to preach, not the doctrine of ignoble ease, but the doctrine of the strenuous life, the life of toil and effort, labor and strife; to preach that highest form of success which comes, not to the man who desires mere easy peace, but to the man who does not shrink from danger, from hardship, or bitter toil, and who out of these wins the splendid ultimate triumph. A life of slothful ease, a life of that peace which springs merely from lack either of desire or of power to strive after great things, is as little worthy of a nation as an individual.” – Theodore Roosevelt

Since we’re quoting Teddy Roosevelt about living a fulfilling life, here’s another excerpt from one of his writings titled “Into the Arena”:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows, in the end, the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

The reason I bring these quotes into this discussion of retirement is that it’s important to remember just because your time spent working up to this point is coming to an end, doesn’t mean you stop laboring or that you don’t need to put effort into new endeavors or into making a difference.

What Are You Going to Do in Retirement?

I was at a gathering recently and in a conversation with two close friends of mine were discussing retirement, and one said to the other, “It’s not whether you can retire, it’s ‘what are you going to do when you retire?’”. He’s right, in my opinion.

The book, “The Magic of Believing,” written by Claude M. Bristol in 1948, wrote of a man he knew: “One man I know who has many achievements to his credit, and who has passed the seventy mark, declared that most people fall by the wayside because they never start anything.

I make it a plan and have for years, to start something new – that is, new for me – at least once a week. It may be only the making of some simple gadget for use in the kitchen, an entirely new sales plan, or reading an unfamiliar book. I find in following this plan not only keeps my body and mind active but also puts to use a lot of imaginative qualities that otherwise might fall asleep and atrophy. This idea of a man retiring when he’s sixty is (in my option) a great mistake.

As soon as a man retires and quits being active mentally and physically, he’s on the way to his grave in short order. You have seen what happens to fire horses when they are retired. You know what happens to your automobile when you leave it outside unused and neglected: it starts to rust and is soon headed for the junkshop. Humans are the same: they deteriorate out or wither and die when they go on the shelf.”

We Need Purpose in Retirement

I have deliberately referenced writings published many, many years ago to point out that this dilemma is as old as time; the human struggle hasn’t changed. We all still need deep purpose in our lives and the ability to make a difference for ourselves and for others to have a fulfilling life. In the practice of helping business owners exit their business successfully, I have heard stories of owners when facing the day of finalizing the sale of their company, don’t show up for the signing. Why? Because all their self-identity and their purpose are in the company they started, grew, and made a great success. To them, parting from it represents an end to all of that and a loss of a sense of control. But exiting doesn’t have to be viewed as an end. But does take careful thought, reflection, consideration, planning, and time to develop a new purpose and consistent passions. For some this is simple, but for others, takes time and consideration. However, it’s a critical area to address. A person who says that finally I’ll have time to play golf will likely find that passion dissipates after a few months and begin to ask, “now what?”

Over the years, our firm has developed a client conversation exercise called “Purposeful Conversation.” Originally, it was developed from our practice of “family legacy development,” We developed our P.C. exercise as a systematized approach to have a deep discussion with a client on “what matters most” to them.

The exercise is broken into three sections: Concerns and Priorities, Commitments and Causes, and Pursuit of Happiness/Life Fulfillment. Each of these areas has nine to twelve potential subjects that a client can consider. We help determine, with the client, the subjects that are relevant and have a deep discussion about importance. This can help them visualize their future, determine their life’s passions during retirement, and help determine what matters most in life. We discuss what makes them happy, what will help them continue to grow, and what brings fulfillment and create a plan now to allow them to focus on and pursue what they desire later.

We also developed a customized workbook to help identify their individual and family values and tie it all into their changing lifestyle.

Pursure Passion in Retirement

Pursuing interests and passions can come in many forms and combinations. Once I took a Lyft from a downtown Denver hotel to the Denver Airport. The driver said that he had started a few tech companies in the past, sold them, and is now driving to meet and learn from other people. I also learned that he decided to learn all he could to master Neuro-Linguistics. This is the study of how verbal and non-verbal language is represented in the brain: that is, how and where our brains store our knowledge of the language that we speak, understand, read, and write. And what happens to our brains as we acquire that knowledge, and how we use it in our everyday lives. I describe it in detail because it’s quite involved! Nevertheless, this gentleman strived to master it and then apply it to his sales training and sales consulting. He told me he was, being hired by companies to facilitate training courses for their sales forces. Wow! Talk about pursuing something else with a passion. I am now connected with him on LinkedIn and learning from him.

You can make a new life in retirement, include whatever you desire, and in a way that brings you maximum fulfillment and meaning. Do whatever “floats your boat,” so to speak.

If you are approaching the runway to land into your retirement years, or the period of your life that transitions you from your profession to your passion, make sure to take time and plan for it. It will be well worth the effort.

I hope you find this article useful. If you have any questions on this subject, feel free to contact me at szeller@zellerkern.com.

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

Key Employees: Build and Protect Business Value

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Businessman and business Woman Holding key

Key Employees

You may have people working in key roles who are instrumental in growing and building the value of your business. These key people can be identified as having the following characteristics:

  • Makes a substantial business contribution
  • Possesses critical information or knowledge
  • Maintains and nourishes key contacts and relationships

Sellable Business

In helping clients plan to build a sellable business, and then eventually exit on their terms and conditions, we emphasize that “key people are a key value driver” in realizing success in both of those strategic goals. And, we find it helpful for owners to have two categories in mind when considering key employees:

  • Building business value
  • Protecting business value

Key people help owners build value and exit successfully as their roles serve in removing the owner(s) from the day-to-day management of the business, and by accomplishing objectives and key results for growing the business, that is aligned with the exit goals of the owner(s). An important planning focus for the owner(s) in building value, as it pertains to key employees, would include alignment of the employee’s performance goals with the exit goals of the owner(s), and a well-defined key employee incentive plan that provides impactful awards for goal attainment and retention.

Owners Beware

Owners need to be aware, that there is also inherent risk related to key employees. Risks involving departure and competition, solicitation of customers and/or employees, and disclosure of confidential information. There is also the risk of losing a key employee due to unexpected death or disability. It can be costly to recruit, train, and compensate for a replacement in such a situation, as well as make up for any loss in corporate earnings. Important planning areas in protecting business value, as it pertains to key employees, would include: Well-written and regularly reviewed employee documents (i.e., Employment Agreement; (listen to ExitReadiness® PODCAST Episode 43 w/attorney Marc Engel) and adequate life insurance coverage on the key employee (listen to ExitReadiness® PODCAST 54 w/Bill Betz of Betz Financial Advisory).

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.