How to Plan a Business Exit Strategy
Conventional wisdom suggests that entrepreneurs begin with an exit in mind. Whether you recently achieved a long-held vision of selling your company—or exited your business sooner than expected, the months after the deal closes are critical for both your financial and personal future.
Navigating an exit can be formidable. But the aftermath also offers opportunities and challenges that entrepreneurs should consider. You’ll need to make some key tax moves to preserve your earnings, and plan for your financial future in light of the changes. You’ll also want to take a thoughtful approach to what comes next career-wise.
Be smart about your post-exit plan. Thinking through the following considerations will ensure your earnings last for the long-term and that the next stage of your career is as meaningful as building your company.
1. Explore Tax Options
A business exit—whether it’s a sale, IPO, or even liquidation—is likely one of the most significant financial transactions of your work life. As such, you’ll want to take measures to mitigate your tax burden on your eventual take-home amount. To do so:
- Investigate capital gains taxes. Work with an accountant and financial advisor to understand both your potential liability and strategies for reducing it. For example, section 1202 of the IRS code exempts small business owners from paying capital gains taxes after a sale if they have held their stock for more than five years.
- Defer income, if possible. If post-sale you realize that your earned income will put you into a new tax bracket, look for ways to defer that income. You might route more of your earnings into tax-deferred retirement or college savings plans. If the terms of the deal include consulting income, then determine whether it makes more sense to take it in the year of the sale or perhaps the year after.
- Make charitable gifts. If you’ve planned to use some of your proceeds to give back, then doing so the same year of your sale can also reduce your ultimate tax bill. However, take note: To deduct charitable donations, you need to itemize your deductions. This only makes sense if your deductions exceed the standard, which increased to $12,200 for single filers and $24,400 for people filing jointly in 2019.
2. Plan for Today and Tomorrow
Evaluate how your exit will impact your immediate finances—and look toward your future. Examine your current expenses and determine how the money you’ll receive will affect the following:
- Your current financial situation. For instance, does it allow you to pay off debt? Reduce the amount you work, or enable you to stop working altogether? Do you anticipate your daily expenses will change after your exit: Will you move into a bigger house, cut back on commuting, or ramp up your travel? Determine what you need, and account for what you want. Then aim to build a budget that achieves both. Before you implement any significant changes, model your plan with those changes in mind. For instance, if you plan to switch to a consulting role and work limited hours—model your new income along with any new expenses. That way, you’ll ensure that your strategy is sustainable for the long term.
- Your future financial plans. In a similar vein, revisit your long-term financial goals. Before exiting your business, you may have been diligently saving for retirement or financing your children’s college fund. Does the exit allow you to achieve your goals faster? Work with your advisor to reprioritize your goals, and perhaps set new ones that dovetail with your updated financial circumstances. For instance, you may set aside a chunk of your exit earnings to fund your retirement. You may also want to re-evaluate your estate plan, establish trusts for your children, or even set up a formal plan for annual giving.
3. Explore What’s Next
Business owners endure a lot of stress growing and selling a business. In fact, chronic stress often comes with the territory: 45% of entrepreneurs report that they’re stressed. If possible, take a breather after your exit to recharge and then look ahead. Plan a vacation for a month after your deal is finalized, and use the time to reflect and consider what’s next.
If you still need or want to work, consider:
- Reconnecting with contacts in your industry. Use the acquisition announcement as a conversation-starter. Reviving relationships with your network can open up a support system for navigating this change, and may also engender future career opportunities.
- Looking into consulting. Leverage your experience and skillset to help other growing companies, and create a next career step that’s perhaps more flexible and creative.
- Giving back to other entrepreneurs. Explore advising or even investing in other startups. Mentor founders or get involved with an angel investing group to put your knowledge, and perhaps extra funds, to good use.
Regardless of what captures your attention, don’t jump in too quickly. Consult with experts like Fifth Third’s wealth management team to carefully plan for your ideal future. For many entrepreneurs, hustle becomes a habit. However, you’ve earned the ability to take the time to find not just the next thing—but the right thing.
The information contained herein is for information purposes only, is not designed to address your financial situation or particular needs and does not constitute the rendering of tax or legal advice. You should consult with your tax advisor or attorney for advice pertinent to your personal situation. Asset Allocation, Alternative Investment and Hedging/Diversification strategies are intended to mitigate the overall risk within your portfolio. Some strategies may be subject to a higher degree of market risk than others. An investor should understand the costs, cash flows and risks inherent in a strategy prior to making any investment decision. There are no guarantees that any strategy presented will perform as intended. Fifth Third Private Bank is a division of Fifth Third Bank offering banking, investment and insurance products and services. Fifth Third Bancorp provides access to investments and investment services through various subsidiaries, including Fifth Third Securities. Fifth Third Securities is the trade name used by Fifth Third Securities, Inc., member FINRA/SIPC, a registered broker-dealer and registered investment advisor. Registration does not imply a certain level of skill or training.