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ComplianceJuly 31, 2023

Business exit strategies: What are the options for getting out of your business?

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No matter how successful your business is or how much you love what you are doing, at some point you must turn the business over to someone else or close it.

This may be a planned decision, or it may result from an unexpected catastrophe. Moreover, even if you plan to work until the day you die, you don't want the IRS to take your hard-earned gains through estate taxes. Minimizing taxes generally requires advance planning.

In this article, we explore your business exit strategy options and their associated legal, tax, and commercial implications.

Choosing a business exit strategy

Business exit planning is not something that many business owners think about until they are ready to get out of a business.

Having a business exit strategy can help ensure a smooth transition to a new business owner. Planning well ahead of time also helps you better manage your business finances and maintain a strong revenue history and recordkeeping to share with a prospective buyer.

But which exit strategy you choose may vary. Perhaps you want to maintain some level of control or involvement or want the company business model to remain the same even after your exit – or not!

You must also consider your business entity. If you operate as a LLC or partnership, you may need to consult a lawyer to understand the rules involved with exiting that entity.

Five ways to leave your business

These are five common ways to extricate yourself from your business:

  1. Pass the business on to family members.
  2. Sell the business through a management or employee buyout.
  3. Sell the business to a third-party.
  4. Liquidate the business and sell the assets.
  5. File for bankruptcy.

Family succession of the business

Most business owners prefer passing the business on to other family members. To make this strategy work, you must plan ahead because there is more involved than simply transferring the assets of the business. Your successor must be prepared to run the business!

Consider involving target family members in your business for months or even years before you pass the business to them.

If you want to exit your business but still need income from it, you might consider staying on in a limited role and receiving a salary for your contribution. You could also sell your business to a next generation family member and fund your post-business life or retirement that way.

For more information, see: Planning for business succession

Consideration:

  • There may be legal implications when transferring ownership of a family business. For example, the IRS may impose estate tax obligations and gift tax obligations. Property transfers are likely to be taxed as well.
  • If your business has multiple owners or shareholders, you will need to ensure they will support any future management team.
  • Be sure to share your exit strategy with non-family managers and ensure they are on board with your succession plan.

Management or employee buyout

In a management or employee buyout, your business team combines their resources to acquire your business in part or in its entirety. This is a good option if you want to preserve what you’ve built, including your brand, customer service, and company values and culture. Transitions like these can also be relatively seamless since your buyers are familiar with the business.

Note: “Employee buyout” can also refer to the act of offering employees a voluntary severance package.

Consideration:

  • If you operate a small business, your management team and/or employees may not have access to sufficient resources or capital to purchase your business at its market rate, so you may be forced to compromise your purchase price and terms.

Selling the business to a third party

If you’re looking to sell your business, you have several options:

  • Merger or acquisition (M&A): A merger occurs when two businesses combine to create a new company and legal entity with a new ownership and management structure. An acquisition is when your company is taken over and fully absorbed by another company.
  • Private equity: This option involves selling and/or issuing shares to a private financial investor. This might be a good option if your business is growing rapidly and has strong profit margins.
  • Initial Public Offering (IPO): An IPO involves selling and/or issuing shares in your business on a public stock exchange.

Considerations:

  • Selling your business to an outsider, as opposed to family or employees, can be a complex and lengthy process with numerous legal, tax, and financial considerations. Managing it on your own can be challenging and you may need the help of legal and business professionals to help you value your business, negotiate the sale, transfer the assets, and make the appropriate tax filings.
  • If you choose to go with a private equity investor, it’s important to screen and select a partner who has the same vision and priorities for your business as you do.

Orderly liquidation

Orderly liquidation involves selling your business assets or liquidating them. If you can make more money this way than selling the entire business, this may be the best option for you.

For more information, see Liquidation as an exit strategy.

Considerations:

  • Most buyers will only buy tangible assets not intangible ones, such as your business name or brand reputation.
  • A company is not automatically dissolved with a liquidation. You will still need to go through the process of dissolution in order to formally close the business.

Bankruptcy

Bankruptcy is an exit strategy that often has negative connotations, indicating a financial struggle or liquidity problems. But bankruptcy or a Chapter 7 proceeding could be an option for you if you have financial debts. Chapter 7 involves your assets being gathered together (other than exempt assets) and sold. Any unsecured debt that isn’t paid off from the proceeds of the sale is discharged, leaving you debt-free.

For more information, see Chapter 7 discharges debts, provides a "fresh start".

Considerations:

  • Any bankruptcy filing will remain on your credit report for 10 years.
  • Not all individuals who have business debt are eligible to file Chapter 7 bankruptcy.
  • When a bankruptcy case is in process, you must stay up to date with all filing requirements and taxes.
  • Declaring Chapter 7 bankruptcy doesn’t mean that creditors will forgive all your business debts.

File a dissolution for $199

Need your filing completed quickly? Select expedited at checkout for an additional $200

Heather Huston
Assistant Service Manager
small business services

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