How to Build a Business Exit Plan: A Framework for Owners

Let's talk about the number one mistake that business owners make when selling their business. My name is Stefan and I run Whitwell & Company, a nationwide wealth management firm serving business owners and C-suite execs. When you're selling your business as a business owner, there's a lot of things going on, a lot of moving parts. Often there's been an intense push in the business to achieve certain milestones and goals so that at the negotiation table you can get the value that you're hoping to get on the sale of your business. There's also the emotional component. Sometimes selling your company can be a very emotional process, emotional as it relates to your team, making sure that they're going to continue to be treated well; it could be worrying about client relationships, making sure that they're going to continue to get treated well by the next owner. And then there's always the worry about price. Am I getting enough? Am I going to have enough? So, a lot of things going on.

One of the big mistakes I see

With that as a backdrop, one of the big mistakes that I see happen is owners are so wrapped up in the sale that they don't engage a wealth advisor with M&A expertise to come into the process early enough to help them plan the structure of the sale. If you come in early, usually there's a lot of collaboration, a lot of positive energy between the buyer and the seller and their advisors. And the lawyers are very willing to work through specific structures and scenarios and ways of putting the deal together that are most tax-efficient for you as the seller. If you come to the table with an idea too last minute, it's not going to work. Nobody's going to want to bend, it can threaten the deal, and it's not going to happen, or if it does, it's going to be very stressful. So my recommendation is that early on, you work with an advisory team that has M&A experience, and sit down with them and look at it and say, okay, what do we need to do? What kind of a structure would be best for me and my family?

Who's at the deal table

Because you see, at the deal table you're going to have consultants, you're going to have CPAs, you're going to have lawyers, you're going to have investment bankers, and guess what? They don't represent you, the entrepreneur, the individual, your family. They represent the legal company, or they represent the legal buyer that's buying the company. There's a different kind of thinking. If I'm at a table with my client, I'm thinking about how do we structure it in a way that's going to maximize his take-home, but also how do we make sure to structure the deal so that the value goes in protected post-sale. So for example, there may be ways, when you have several, two, three, years before the sale, to move some of that future upside into an irrevocable trust, for example, that would then protect those assets from any outside creditors, any kind of errant lawsuits, things like that. But you can't do that last minute. The IRS is going to challenge most structures that you put into place very last minute. And understandably, I mean, that's kind of their job. But if there've been two or three years for that structure to age, then time works for you and to your advantage. Whereas if you do it last minute, time works against you and it works to the IRS's advantage.

Creative structures, but not last minute

So there's some really creative structures that, for the sake of keeping this video relatively short, we're not going to go into right now. Some involve permanent trust structures, others involve permanent life insurance. Sometimes they involve both of them. Sometimes they can involve structured sales with trusts and deferring part of the gain over time. A lot of different strategies that can come into play, and they're not all right for every transaction. So part of what we do is sit down, really understand your needs, your business, the transaction type you envision. And then we work backwards to figure out, okay, what are the tools that would work best for you and your circumstances? And then work with you to implement that well in advance of the sale, so that come time to exit, you're ready. And a lot of the gains will flow into protected entities, so that not only do you get to keep more of what you worked so hard to make, but that it's now in a structure that's protected and can't just be taken by an overzealous lawyer who sues you due to a car accident, or a new company you were involved with where you were on the board, or any number of scenarios where you could be incurring significant individual liability.

The main takeaway

So, main takeaway: don't make the mistake of waiting to the last minute simply because you're overwhelmed and thinking about everything that's going on. Here's one last psychological reason why people wait to the last minute. Sometimes people feel like they're going to jinx the situation to plan it out too much in advance, or they worry that things are going to evolve in a way that's different than the plan that you had in place. But that logic is so flawed, and here's why. You simply don't have any legit low-risk options last minute. You simply don't. There's a lot of people selling these kind of cockamamie structures and claiming to have legal letters that say it's okay, and making claims that nobody's ever gotten in trouble with the IRS about it, but you've got to be really careful. And they're often just people selling you stuff that is going to, in my opinion, definitely blow up in your face. So, last minute, very dangerous place to play. If you've got two or three years in advance, there are so many more powerful tools that you can safely access and use, so that as a net result more of the money goes to you, more of the money is protected. And depending on the size of your sale proceeds, it also could help tie into your estate plan, and having it in a trust could benefit you by circumventing the death taxes, taxes that would be owed upon your passing. So getting around estate tax could be another benefit. But you can't do that last minute. Don't make the mistake of thinking you're going to put it off till later because you don't want to count your chickens until they hatch. I get the humility of that. I get the temptation of that. But it's such a bad thing to do. You'd be so much better off, and save millions of dollars potentially, by sitting down with an advisor early on, because sometimes you need to plant the seed early in terms of putting a piece of the structure into place now, even if you don't finish all the bits and pieces of it until later. But what you can't do later is put that first flag in the ground that you needed to age to give it a certain legitimacy and procedural integrity, last minute. So do yourself a favor. You owe it to yourself. You've worked so hard to build the business that you're going to sell one day. Invest in you and your family and your future by making sure that you get the right M&A-fluent wealth management firm to sit down with you and plan this stuff out together. Because then, when you go into the sale, you're going to be a lot more confident. You're going to know that when it sells, your family is going to be that much more protected and you're going to be more protected, and that's a great feeling. But you're not going to have that unless you start early. All these last-minute things that people try to do are super risky. You don't want to do that.