The primary goal for many business owners is accelerating business value so the business can provide them financial independence. Typically, accelerating business value is a matter of making the business attractive to potential buyers. But what do potential buyers look for, and how can you build a business that both helps you achieve your goals and is attractive to potential buyers?

Today, we’ll examine how Exit Planning provides a unique path to accelerating business value, why building a sellable business is the same thing as building a good business, and which elements make a business attractive to potential buyers.

Exit Planning Helps Accelerate Business Value

A common misunderstanding about Exit Planning is that it focuses strictly on the long-term endpoint of business ownership: leaving the business. This misinterpretation of Exit Planning can lead business owners to miss opportunities for value acceleration.

However, Exit Planning can have tangible effects on both short-term and long-term business value acceleration.

Exit Planning can give business owners unique strategies for accelerating business value because many of the elements that are essential to Exit Planning also make the business more sellable. And while every business is unique, there are common elements that make businesses more sellable than others—Exit Planning addresses many of these elements.

In short, accelerating business value and planning for your eventual business exit are one in the same. They each focus on what you must do to position your business to sell for top dollar when it’s time for you to leave it—by choice, death, or otherwise.

What Makes a Business Sellable?

Some of the most important elements that make a business sellable include the following:

• Independent management teams
• Strategies to ensure sustainable recurring revenue
• Turnkey systems and processes

Not coincidentally, these elements often appear in well-run, successful businesses. In other words, even if you never intend to sell your business, the things that make a business successful often make that business sellable as well. Additionally, even if you have no intention of ever selling, these elements can help the business run more smoothly while you own it and give you a backup plan if you change your mind about never leaving.

Let’s look at how each of these elements affects business success and salability, and how they can help accelerate business value in both the short and long term.

How Independent Management Helps Build Value

An independent management team is one that has the ability and authority to make decisions that can take the business to the next level. They still report to you, but they also take some of the responsibility for important decision-making off of the business owner’s shoulders, which makes the business less reliant on the business owner.

In the short term, an independent management team can allow you, as the business owner, to focus on areas of the business that are your strengths, rather than having to do everything all by yourself. For example, the management team may help expand your customer base using their accrued business relationships or create, document, an execute on operational efficiencies that improve cash flows.

In the long term, an independent management team is essential to a successful pursuit of your post-ownership goals. Whether you sell to an outsider, employee, or family member, the independent management team will drive a good portion of the business’s value because that team will essentially be the ones running the business after you leave it.

The right independent management team can even give you more time to dedicate to your personal financial strategies in the context of how the business is performing. Because remember: The endpoint of a successful business ownership journey is the ability to leave the business when you want, to whom you want, and for the money you need for financial independence.

The Role of Sustainable Recurring Revenue Strategies

Creating sustainable recurring revenue is difficult. Fortunately, with an independent management team and help from your Advisor Team, creating and installing strategies that position your company for sustainable recurring revenue often becomes easier.

Sustainable recurring revenue is the result of a complex web of elements. Things like a diverse customer base that isn’t concentrated among a few large customers, the ability to innovate, and building products and services that cannot be commoditized.

Sustainable recurring revenue can help bolster the business’s performance in the short term while making the business more attractive to potential buyers. The reason why is simple but easy to overlook: Potential buyers generally prefer to buy companies that regularly make money over businesses that they need to salvage or rebuild themselves.

Turnkey Systems and Processes Are Key

In general, a business that is easy to run is worth more to potential buyers. As a business owner, what seems easy to you may not be as easy for a potential buyer to do. And since vanishingly few business owners want to sell their businesses to someone else and then work as an employee for the new owner, it becomes crucial to document successful systems and processes that will stay with the company after you leave it.

Again, even if you never intend to sell your business, documenting the systems and processes that make your business run well can improve its performance in the short term. It helps make the business less reliant on you and can provide a safety net if you were ever unable to run the business for any reason.

For example, say you have a family crisis that requires your full attention for an indeterminate amount of time. Documentation of systems and processes could help the company continue to run well even if you aren’t there to run it.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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As a business owner, you are likely the most important person for your company’s success. But when you are the hub of your business, it can have negative effects on your business’s value, limit your business exit paths, and in some cases make selling your business impossible.

In this newsletter, we’ll show you why beginning the process of stepping aside before you’re ready to leave is one of the most consequential decisions you can make when planning for your business’s successful future.

You Shouldn’t Do It All

Being in a position where the business cannot survive without you can be perilous for planning for a successful future. But for many business owners, making all the biggest decisions is what got them to this point in the first place. It can be tempting to ask, “Why would I change something that has worked so well?”

One of the most attractive selling points for potential buyers of your business—whether you sell to an outsider, an insider, or a family member—is a business that functions well without you. That’s because businesses that can function well without the owner often have numerous Value Drivers installed that allow it to function without the owner. Some of these most important Value Drivers include the following:

• A next-level management team
• Documented processes that tangibly improve cash flow
• Proven growth strategy
• Diversified customer base
• Sustainable recurring revenue that’s resistant to commoditization

In many cases, installing these important elements not only helps increase your business’s value but also relieves you of some of your duties as a business owner that you may struggle with or not enjoy.

In short, there is no doubt that the business needs you to survive at the beginning. But in order for the business to thrive as it grows, it often cannot rely on one person for its success. Delegating responsibilities to other people and processes, and thereby reducing the business’s reliance on your presence, can both make it more valuable to potential buyers and give you more time to focus on the things you love most about running your business.

Pick Your Path (Or Others Will)

After a long successful business career, you likely expect to be able to choose how you leave the business. After all, you probably spent years or decades having control over your own destiny. But if you don’t position the business to thrive without you, then you may have no say in what should have been the culmination of all your business success: a fulfilling exit.

For example, say that you wanted to eventually transfer your business to a family member. You may train them and give them guidance, but when given opportunities to make decisions, you find that they don’t seem capable of consistently making the right decisions for the business. You often find yourself swooping in to save the day.

You might decide that this family member isn’t the right person to transfer the business to, and then begin looking for a third-party buyer. But if you were still the person making most of the decisions, the third-party buyer may wonder what happens to the business after you leave it.

A big reason why business owners find themselves scrambling as they approach retirement is because they have always made all the big decisions for the business. Even if they make the right decision every single time, the fact that they are the only one that can do it can put them in a tough corner because it forces potential buyers to ask, “If this owner isn’t running the business, will it succeed? If not, what am I paying for?”

In this case, they’d be paying for your presence, which means that if you wanted to sell your business and achieve financial security, you’d likely need to stay at the business, working for someone else, until it was ready for you to leave it.

This concern is not unique to sales to third parties either. For instance, let’s say that the family member you wanted to transfer the business to was an exceptional leader. They make good decisions, bring new ideas to the table, and express their ambitions of ownership to you. But as time goes on, this family member may feel like your exit timeline isn’t moving quickly enough for them and that they’re doing more than they’re being compensated to do. So, they start their own business or go to a company that will allow them to pursue their ambitions on their timeline.

In this case, the person you wanted to sell to, a trusted insider, decides that the incentives you offered weren’t enough to keep them around. This can put you back at Square 1, but with less time to pivot your plans.

Getting to pick your Exit Path is possible through prudent, preemptive planning. Without a plan for how you will eventually give up control of your business, it can be exceedingly difficult to maintain control over how you exit.

Giving Up Some Control Now for More Control Later

To maintain long-term control over your future, it’s so important to be willing to give up some control in the shorter term.

Even if you don’t intend to exit your business within the next 5, 10, or 20 years, beginning the process of transferring control of your business to next-level managers and documented processes is something that takes time. The good news is that when done properly, delegating responsibilities and control away from yourself can have a stackable effect on how quickly your business can become less reliant on you.

For example, if you were to try to find and hire a next-level management team, create and document every process for the company, all while submitting yourself to the everyday grind of owning a business all by yourself, it would take a very long time. You’re only one person, and you’re also running a business!

But if you were to start by installing a next-level management team in Years 1 and 2, they would be able to begin to help build the processes and documentation that allow the business to thrive whether you’re making the decisions or not. This next-level management team would be able to accomplish more than you could by yourself because not only do they have the expertise but also there’s more than one of them.

This can help position your business to thrive without you, which can give you more options and more flexibility to create plans that allow you to eventually exit the business on your terms. And even if you never intend to leave your business, the elements that position business owners to exit their businesses successfully are elements that make the business run even more effectively even while you are there.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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For many business owners, transferring their businesses to their children is important both financially and emotionally. But transferring to children isn’t always easy, especially when family harmony is at stake. Let’s look at a fictional but representative story about some of the challenges of transferring a family business to children.

Leave Me a Business Worth Staying At

Eugene Chen was approaching his 40th year as owner of a regional manufacturer that produced specific parts for electronics. It was a lifelong dream of his to eventually retire from the business, transfer it to both of his children, and serve in a consulting role to help them guide the business to new heights. The day his son and daughter were legally allowed to work, he began training both of them for specific roles in his company.

His daughter, Ashleigh, had always taken on the bulk of behind-the-scenes operations. She played a key role in hiring, identifying key employees, maintaining client and vendor relationships, and building her father’s Advisor Team.

Though successful, Eugene had a deep stubborn streak and did not like advice. At least once a week, Ashleigh had to remind her father, “If you want me as part of this business after you leave it, you have to leave me a business worth staying at, and the only way that happens is if you take their advice once in a while.”

Father’s Special Boy

Eugene’s son, Horace, was responsible for, as he described it, “posting online for reach.” He spent most of his days on his phone posting on social media and then showing his father all the likes his posts received. “This will be great for business, I’m sure,” Eugene often told him, despite no tangible evidence that anything Horace was doing was affecting the business positively at all. But Eugene was so proud to see his son being active in the business that he chose to consider any activity good activity.

For years, Ashleigh had joined her father’s quarterly retirement planning meetings with his Advisor Team. She often discussed her concerns about her brother’s work ethic with the Advisor Team privately, expressing fear that her father would eventually make her brother a co-owner of the business. Even in the face of mounting evidence that his son was just along for the ride, Eugene still considered Horace his special boy who could do no wrong.

Then, Ashleigh’s fears became reality. Her father told his Advisor Team that he intended to make Ashleigh and Horace co-owners of the business and exit in three years.

When he handed his advisors and daughter a rough org chart for after he left, Ashleigh saw that every employee eventually reported up to her. To her horror, she saw that her father intended to have her report to her brother, and her brother reported straight to their father, even though he would no longer be officially running the business.

After reviewing his initial plan, Ashleigh was blunt. “If this is your plan, count me out.”

When Emotions and Reality Collide

Business owners are used to setting the rules themselves. How they run the business, the people they hire, the strategies they implement all tend to come from the business owner. But as the business grows and the owner approaches their eventual exit, this top-down approach can sabotage their Exit Plans.

In the Chen family example, the owner clearly had a favored child, even though that child was doing nothing to drive the business forward. It’s not uncommon for business owners to have a blind spot for their children’s weaknesses in running a business, especially if that child has been part of an otherwise successful business. But allowing a plan to be guided by blind spots can lead to a dead end.

In situations like these, an Advisor Team can provide objectivity and evidence-based opinions to help guide business owners toward their real goals. It would have been easy for Eugene to view his daughter’s angst as misplaced jealousy stemming from a sibling rivalry. However, his Advisor Team would be able to show precisely how his children were contributing to the business and what their contributions would mean for his post-exit life.

The Financial Side of Family Transfers

In most cases, business-active children do not have the funds to pay for the value of the business up front. This often means that in order for a business owner to receive the maximum value for their business in a transfer to children, the business must continue to thrive after the owner transfers it.

For the Chen family, this would hardly be an issue if Eugene correctly recognized that Ashleigh was the catalyst for success. Instead, in proposing that both children get an equal stake in the company, he was actively sabotaging his plans in favor of doing what felt good in the moment. Ashleigh was the driver of company success, and losing her would be devastating to the company’s performance.

After Ashleigh drew her red line in the sand about her brother becoming a co-owner, Eugene’s Advisor Team was able to defuse the situation with years of performance statistics. They showed Eugene exactly what Ashleigh’s roles and contributions were compared to Horace. And the ace up their sleeve was when Ashleigh took six months off for maternity leave: For those 6 months, Horace was put “in charge,” which aligned precisely with the company’s worst two quarters in its history.

“If you want to be able to exit your business on your terms,” his advisors told him, “you may need to reconsider how you’re transferring ownership. You simply cannot afford to lose Ashleigh.”

Be Aware of Unseen Errors

Additionally, Eugene made a common but initially unseen error in his planning: He assumed that his son would want a share of ownership. Many business owners assume that the successors that they choose want to become owners themselves. But sometimes, the owner’s chosen successor has no interest in ownership, which can crack the entire foundation of a business owner’s plan.

After the tense meeting with his Advisor Team and daughter, Eugene spoke with Horace privately about what had happened. He told Horace his intentions of giving him a 50% ownership stake in the company when Horace blurted out, “Dad, are you insane? You have to let Ashleigh run this thing.”

Eugene was stunned by what his son said and tried to convince him otherwise. But Horace held firm.

“I like what I’m doing, and I’ll take, like, a 25% salary increase instead, but I really don’t want to run this business. It seems way too hard.”

Realigning Goals in Family Transfers

Though he knew how to run a business successfully, Eugene committed three major errors in his planning.

• He misidentified key employees.
• He misunderstood how the transfer to his family would work financially.
• He incorrectly gauged his children’s interest in running the business.

Thankfully, with help from his daughter, Eugene’s Advisor Team was able to help him realign his goals with the realities of his business.

In the end, he transferred 100% ownership to his daughter on the condition that she find a fitting role for his son in the business. Fortunately, Ashleigh had already begun the process of hiring a social media director to actually do the things that her brother said he was doing. When she told her brother that he would now be reporting to this new social media director and have performance goals, he was relieved and accepted the role.

Under Ashleigh’s leadership, the business continued to thrive and grow, allowing her father to formally leave the company on his terms with financial security. Her father took up the role of consultant to the company, which often meant checking in to make sure that his son was still employed at the company.

Think Before You Act

Transferring your business to business-active children can be a prudent decision. However, it’s important to determine whether your business-active children are capable of running and growing the business after you transfer it to them. Because unless your business is simply a vanity project, it’s likely that its performance after you leave it is crucial to the success of your post-ownership life.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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Your next-level managers and key employees are likely the most important element in determining your business’s value. Given their importance, retaining these people is possibly the most critical thing you can do to build your company’s value. In this newsletter, we’ll look at two common and effective strategies for retaining important employees and explain why retention plans can support your long-term goals in terms of building business value and selling your business to achieve financial security.

1. Stay Bonus Plans

As the name implies, stay bonus plans are plans that give certain employees bonuses for staying with the company for a set time frame after a certain date. For this discussion, the “certain date” is the day you leave your business.

For example, say that you have an employee who invented a method for streamlining operations in your business, allowing you to reinvest the money from new efficiencies back into the business. This is clearly an employee that you would like to keep for the long term.

However, an employee this talented may also begin to look for greener pastures, especially if they learn that you’re looking to exit the business. And losing an employee like this as you plan for your eventual business exit could force you to scuttle your plans altogether.

In this case, a stay bonus plan could be a strong strategy to keep that employee at your company. It would offer the employee a monetary bonus for staying with the company for a certain period after you leave the business. For example, you might offer this employee a $100,000 bonus for staying with the company for 4 years after you leave it, which would facilitate a smoother transition between owners while giving the employee incentive to stay with the company.

When buyers have more assurance that the company’s key employees will remain after the transition, it can make the company more valuable to them. After all, the fewer important employees they have to replace, the less time and money they need to expend finding their replacements.

Your Advisor Team can help you identify key employees and create plans that speak to their motivations to entice them to stay with the company after you leave it.

2. Salary Continuation Plans

Sometimes known as “golden handcuffs,” a salary continuation plan is another strategy you might use to encourage key employees to stay with your company after you leave it. The benefit to key employees is assurance that they will have a steady stream of income even after they leave the business.

For instance, say that you have an executive vice president of sales who drives the bulk of your new business. To ensure that she not only stays with the company but also continues to perform well after you leave it, you might craft a plan that offers to match a percentage of her commissions as deferred compensation, as long as she achieves performance metrics and stays with the new ownership for a certain period of time.

In this scenario, your key employee gets the peace of mind of knowing she has a steady income stream after she leaves your business. She is also motivated to continue to build the business’s value because the better the business does, the more money she stands to make.

Additionally, there could be tax advantages to implementing a salary continuation plan for both your company and your employee. Tax implications vary by state, but a tax advisor may be able to share insights on any tax benefits a salary continuation plan may offer your business.

How These Plans Help Build Value

Stay bonus plans and salary continuation plans can help build business value by ensuring that the most important people at the company remain at the company after you leave it. When a new owner can count on the company’s best people being committed to the company, it could make the company more turnkey and thus more valuable to them.

A key component of both plans is that they typically include vesting schedules. They also often include certain performance standards that employees must meet to receive the full value of their stay bonus or salary continuation plan. In these ways, these plans motivate key employees to continue performing well and stay with the company long term because doing so will have direct financial benefits for them.

When executed correctly, stay bonuses and salary continuation plans could create a virtuous cycle: Key employees perform well, increase business value, and get rewarded. When they’re rewarded, they’re motivated to continue performing well, which continues to increase business value. Business performance entices buyers, and you position yourself to sell for top dollar. After you leave, if the key employees continue to perform well under new ownership, they continue to get rewarded.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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When you’re at the helm of a successful business, one of the most important (and counterintuitive) questions to ask yourself is, “Who can run this business when I am ready to leave it?” Whether you plan to retire or die at your desk, the answer to this question may determine whether you can call your business ownership journey a success or a failure.

Let’s look at why it’s so important to identify, train, and retain next-level managers and key employees long before you exit.

If You Always Run It, You Can Never Leave It

Generally, prospective buyers of your business will only pay top dollar for a business that runs well without the business owner at the helm. In other words, if your business is reliant on your presence for its success, it becomes exceedingly difficult for you to leave it and achieve financial security.

In this scenario, perhaps the only way that you may be able to achieve financial security is by selling the company and then working for the new owner until you were financially secure. Very few business owners prefer this possibility.

In order to position yourself for a business exit on your terms, there are three important things that you need to begin doing:

• Ensure leadership continuity
• Identify key employees
• Retain both

Ensuring Leadership Continuity

When you’re working to ensure leadership continuity, there are several traits that you should look for:

• The ability to take the business to the next level
• A full commitment to the company

These traits are important regardless of whether you want to sell to a third-party buyer, a family member, or an insider. And often, the search for your successor begins by installing a next-level management team.

Your next-level management team is a team of managers that allows the business to thrive even if you aren’t present. This is an extremely important element of business value because if the business can run well without you, it becomes more attractive to potential buyers.

It’s possible that a member of your management team becomes your successor. It’s also possible that your next-level management team remains at the company after you sell it to a third-party buyer. Regardless, installing a next-level management team can help you position yourself to exit on your terms, ensure leadership continuity, and make your company as attractive as possible to buyers.

Most importantly, a next-level management team can often provide the leadership necessary if you were ever unable to run the business. In the worst case, this management team can implement a business continuity plan if you were to die or become permanently incapacitated before your planned business exit. And on the more positive side, your next-level managers would have the skills to run the business after you leave it, which could position you to receive top dollar for selling your business.

Identifying Key Employees

In addition to next-level managers, it’s important to identify, attract, and retain key employees. Key employees are people whose presence has a tangible positive effect on your business. The main difference between a next-level manager and a key employee is that a key employee may not have the skills or ambition to become a business owner. Nonetheless, key employees are so good at their jobs that losing them would tangibly harm your business.

Because of their tangible effect on business performance, it’s important to entice these employees to stay with the business after you eventually leave it. This can be challenging if your key employees are loyal to you rather than the company. For instance, if you announce that you’ll be selling the company and key employees decide to leave when you leave, it could affect your business’s value to potential buyers. As such, it’s prudent to establish strategies and plans that will allow your company to retain your key employees even after you leave it.

On Employee Loyalty

Many business owners confront the challenges of manager and employee loyalty too late in their Exit Planning process. It bears repeating: Any buyer of your company will expect the company to run well after you sell it to them. In most cases, this means that your company will need its next-level managers and key employees to stay with the company after the transition.

If your next-level managers and key employees have no motivation to stay after you’ve exited, it becomes challenging to sell your business and achieve financial security.

Retaining Talent After You Exit

Consider implementing strategies that “handcuff” your next-level managers and key employees. While the details of such strategies and plans will vary based on your business and its needs, there are several common elements of a good plan to retain next-level managers and key employees.

• Plans must address their individual motivations.
• Plans must encourage ambitious goal achievement.
• Plans must keep them with the company after you leave.

Next-level managers and key employees tend to have different motivations for their high performance. In many cases, the motivation is more money. But they may also be motivated by things like the freedom to make their own choices, internal recognition, or even ownership. In other words, any incentive plan that handcuffs your employees should not be one size fits all.

How can you determine what motivates next-level managers and key employees? In addition to asking them yourself, your Advisor Team can help you determine what may entice your company’s most important people to stay on after you leave. This can be especially effective if you have concerns that your employees and managers may skirt around the issue if you ask them the question yourself.

After determining the motivations of the people you want to keep, it’s important to establish ambitious but achievable goals for them to reach to obtain any bonuses or perks that your plan offers. In short, better performances lead to better rewards, which can keep them motivated throughout the transition.

Finally, your plan to retain next-level managers and key employees must ensure that they stay with the company even after you leave it. One common strategy is to use a vesting schedule that pays a full bonus over a set number of years after your exit, with the caveat of if an employee leaves before they’re vested, they forfeit the entire bonus.

Continuity Is King

A business owner leaving their business can be a catalyst for chaos without a plan. To best position yourself to avoid the chaos of your absence, you should consider creating a continuity plan for your next-level managers and key employees long before you need it.

When a buyer considers purchasing your company, they are often purchasing the continuing good performance of the company after you leave it. Your next-level managers and key employees are the ones that will drive good performance after you leave. That’s why it’s so important to start identifying, training, and retaining these important people in your company right away.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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Tax minimization is likely a key part of running your business. When you can position your company to pay only what it must in taxes, it could give you more money to take home or reinvest in your business. But have you begun to prepare how you’ll minimize your taxes when you eventually leave your business?

Selling your business comes with tax implications that can change the trajectory of your post-exit life if you aren’t prepared for them. Let’s look at some of the foundational elements of preparing your tax minimization strategy in the context of eventually leaving your business.

Know Your Entity

Sun Tzu once said “Know your enemy.” When it comes to tax minimization strategies for business owners, it’s crucial to know your entity. Because if your business is the wrong entity, it can become the enemy of tax minimization.

For owners of small to mid-sized businesses, there are five different types of business entities that you may consider:

• Sole Proprietorship
• Partnership
• C Corporation
• S Corporation
• Limited Liability Company

If you aren’t sure which entity your business falls under, your Advisor Team—specifically, your tax advisors and attorneys—can help you find out. And knowing the type of entity your company is could have huge implications for your tax minimization strategies.

For example, in a general partnership, you and your co-owners would be personally responsible for any taxes the company must pay. However, if your company were a corporation, your business would be considered a separate entity, and thus the business owner would not be personally responsible for its tax or debt obligations.

For today’s discussion, we’ll focus on two of the more common entities that small to mid-sized businesses tend to be—C corporation or S corporation—and how each entity can affect your tax minimization strategies.

Starting as a C Corporation

Many small businesses begin as C corporations. In terms of tax minimization, C corporations may not be the best strategy for many small to mid-sized businesses. That’s because C corporations face double taxation. With a C corporation, both the business owner and the business itself pay taxes. Currently, C corporations pay a 21% corporate tax rate. Then, business owners themselves must pay taxes based on any earnings they receive from the corporation.

So, if you wanted to sell your business as a C corporation, you could end up paying two taxes on the funds you receive: once for the business itself and once based on your personal income changes from the sale.

This does not necessarily mean that C corporations are always a bad idea for business owners. For example, if you wanted to access foreign investment in your company to help it grow, a C corporation would allow you to do so. Likewise, if you consistently intend to reinvest all profits back into your company and take no distributions whatsoever, a C corporation may help you minimize your taxes.

Always consult with your tax advisor when considering the type of entity you would like your business to be. But generally, small to mid-sized businesses that are C corporations can create tax disadvantages for business owners when they are ready to sell their business, primarily due to double taxation.

Converting to an S Corporation

Many small to mid-sized business owners find greater tax advantages when they convert their C corporation to an S corporation. An S corporation is what’s called a “pass-through entity.” Simply, this means that S corporations pay no corporate tax. Instead, the owners of the business pay taxes from business profits on their personal income.

In the context of exiting your business, the tax advantages of selling an S corporation are pretty straightforward: You’re only taxed once when selling an S corporation versus being taxed twice when selling a C corporation.

Though it’s fairly simple to begin the process of converting a C corporation to an S corporation—you file Form 2553—it can take years for the tax consequences of your conversion to settle.

For example, if you convert a C corporation to an S corporation and then sell your company within 5 years after conversion, you may still have to pay a Built-in Gains (BIG) tax, which is a 21% tax on any assets that appreciated in value while the company was a C corporation. In other words, if you convert a C corporation to an S corporation to avoid double taxation, there’s essentially a 5-year period before you are no longer on the hook for the BIG tax.

So, while there are tax advantages to selling an S corporation compared to a C corporation for small to mid-sized business owners, in order to take full advantage of those advantages, you need time. In short, if you plan on exiting your business within the next 5 years but have not yet converted your C corporation to an S corporation, you may feel the sting of double taxation via the BIG tax.

From Entity to Deal Structure

Once you’ve established the type of entity you need your business to be to leverage tax advantages, it’s also important to consider the structure of your eventual deal.

Deal structures are complex and will depend on your specific situation and needs. However, it’s important to note that you will likely face two common types of deal structures: an asset sale or a stock sale.

Briefly, an asset sale is when a buyer purchases specific things about your business, like equipment and inventory, but does not take on the business’s liabilities or debt. In many asset sales, you retain ownership of the business itself.

In a stock sale, a buyer does take on the company’s debts and liabilities, and you no longer own the business. Stock sales usually have more tax advantages for business owners, primarily because gains from sales of stock are taxed at capital gains rates, which are typically lower than ordinary income rates that you would have to pay in an asset sale.

Leverage Your Advisors

As you plan for your eventual business exit, here are a few key points to keep in mind:

• Your business entity can have big effects on how much money you take home when you eventually exit your business.
• Reaping the benefits of converting your business entity from a C corporation to an S corporation can take time, which means that you should start planning well in advance if you intend to convert.
• Deal structures have tax implications. And buyers who are willing to pay top dollar will likely have a team of professionals who negotiate to do everything they can to minimize their tax liabilities. You should consider arming yourself with similar expertise instead of trying to negotiate with professionals by yourself.

Tax implications are complicated, and that’s before you consider each state’s tax laws and how they can affect your tax minimization strategies. Fortunately, you don’t have to approach tax strategies alone (and we argue that you shouldn’t approach them alone).

Above all else, you should avoid ignoring what the tax implications of selling your business might be until the last minute. Just because it’s complicated doesn’t mean it’s impossible. With the right expertise and enough time, you can take steps to minimize your tax obligations and maximize your wealth from the sale of your business.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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There are a few better feelings for business owners than winning a huge contract or being offered an opportunity to expand the business. But these big opportunities could come with unforeseen risks. How can you determine when to pursue a game-changing but risky opportunity and when to play it safe?

Often, objectivity is crucial in these situations. Let’s look at a fictional but representative story about how a business owner leveraged her Advisor Team to determine when to pursue opportunities and when to hedge against risks.

The Whale

Genevieve Tankian was anxious and excited. An enormous prospect had submitted a request for proposal from her company, which would make her company their primary vendor.

In reviewing her prospect’s needs, she calculated that if her company won the contract, it could increase revenue streams by up to 75% a year. But as she dove deeper into the prospect’s needs, she began to wonder whether her company could handle a contract of this size.

The prospect required her to fulfill orders both locally and in all surrounding states. The prospect’s expected turnaround times for delivery were tighter than any other company she had served in the past by far. She was worried that her company simply didn’t have the resources to do everything the prospect requested.

Genevieve felt stuck. She wanted to submit a proposal, but she did not want to position her business to disappoint the prospect. Unsure of what to do next, she contacted her business attorney, who also specialized in Exit Planning.

After reviewing the prospect’s needs and ensuring that there were no legal hurdles to Genevieve submitting a proposal, her business attorney asked her how confident she felt in fulfilling the requests from the prospect.

“I want to say we can do it, because this is a business-changing contract. But I’m not 100% certain we’d be able to handle this prospect and all of our current customers at the same time.”

So, her business attorney gathered his most trusted advisors to help Genevieve navigate the opportunities and risks that this prospect’s RFP created.

Being Optimistic and Realistic

After assessing Genevieve’s business capabilities, her Advisor Team presented three facts about how accepting this enormous contract could affect her business:

• Her business in its current state would likely not be able to fulfill the needs the prospect presented without more resources.
• The company’s financials were strong enough to allow her to take out loans to expand her workforce and essential operations to fulfill the prospect’s needs.
• She would likely need to hire a manager to focus strictly on the prospect or on her business’s current customers.

Genevieve was excited to learn that it would be possible to serve this prospect, but she was also fearful that the risks she would have to take would have negative effects on her current customers. She had built relationships with her current customers over two decades, and she wasn’t sure she was comfortable handing that off to someone else. At the same time, the enormous prospect was considering her business primarily based on their relationship with Genevieve.

Many business owners in the process of growing their business face challenges like these. There’s often an element of give and take when growing a business, which can lead business owners to make emotional decisions that may not be in their best interest.

Working with her Advisor Team allowed Genevieve to uncover some of the things she would have to do in pursuit of the growth she wanted her business to experience. She had never been in a position to expand so aggressively, and she worried that she would overshoot her capabilities if she tried to figure it all out by herself.

Fortunately, her team of objective experts laid out the strategies she could take to best position her company to win the contract, deliver on her obligations, and still provide high-quality service to her current clients.

Always Look Both Ways

Just as we all learned as kids when we were crossing the street, it’s important to look both ways. Understanding the risks that opportunities create can help you protect your business from unexpected issues down the road. Likewise, keeping an open mind about opportunities without thinking about all the ways everything could go wrong can give you the confidence you need to pursue business growth.

Risky opportunities can come with huge rewards. But as a business owner, you don’t want to run headlong into a risky proposition if it could do harm to everything you’ve built thus far.

On the other hand, refusing opportunities because they seem too risky or unfamiliar on their surface could position your company to stagnate and plateau. And of course, exciting, risky opportunities often inject an element of irrational emotions that can cause business owners to focus only on the short term to the detriment of long-term success.

This is why objectivity and expertise are so important for business owners to leverage. A team of advisors will likely be obligated—if not legally then for the sake of their reputation—to pursue strategies that are in the best interest of your business. They could help you assuage irrational fears, stay realistic about your business’s capabilities, and allow you to pursue opportunities while reducing your exposure to downside risks.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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The Importance of a Business Valuation

Summit White Paper: Take Control of Your Business Exit & Your Financial Future

Introduction

Have you ever wondered what your business is actually worth? Not a guess, not a number from a conversation at an industry event, or with family or friend, but a real, defensible number that informs the most important financial decisions of your life?

A current, accurate business valuation is the foundation of every successful exit plan. Without one, you are making decisions about your financial future based on assumptions rather than facts. Whether you plan to sell your business to a third party, transfer it to a key employee or family member, or simply want to understand where you stand today, the valuation conversation is the starting point.

Need an experienced professional to complete a valuation of your business and guide the exit planning process?

Contact Summit M&A Advisors to schedule an initial conversation.

Business owners who understand their company’s value—and how that value is determined—are better positioned to maximize what they receive when they eventually transition out of the business. Those who ignore valuation often discover too late that they have a significant gap between what they need from their business and what it can actually deliver.

In this white paper, we will explore the importance of business valuations in the exit planning process, how valuations are conducted, the different standards and approaches used by valuation professionals, and the critical role that valuation plays in every component of a comprehensive exit plan.

Our goal is to help you understand why a current business valuation matters and how it can be used to protect your financial future.

Consider the three universal objectives that every business owner must address when planning an exit:

Departure date. When do you want to leave the business? If your company’s current growth rate cannot close the gap between today’s value and your financial target by your desired departure date, you need to know that now—not when you are ready to sell.

Financial goals. How much money do you need—and want—from the sale or transfer of your business? Holding your financial objectives next to the current business value reveals whether there is a gap and, if so, how significant it is.

Successor owner. Who will take over the business? If you cannot achieve your financial goals through an insider transfer, you may need to consider a third-party sale. The valuation helps clarify which path is feasible.

The Role of Valuation in Exit Planning

Business valuation is not a one-time event. It is a thread that runs through every step of the exit planning process. Here is how valuation plays a critical role in each major area of planning:

Maximizing and Protecting Business Value

Before you can grow the value of your business, you need to know where you are starting. The initial valuation establishes a baseline against which all future progress is measured. As you implement strategies to build value—such as strengthening your management team, diversifying your customer base, or improving operational systems—periodic revaluations benchmark your progress and demonstrate the impact of your efforts.

Third-Party Transfers

If you plan to sell your business to a third party, knowing the current value helps you determine whether now is the right time to sell or whether you need to continue building value. A lower value business may attract a different set of potential buyers than a higher-value business, and understanding where your business falls on that spectrum affects both your timeline and your strategy.

Industry trends, economic conditions, and the availability of credit all influence the price a buyer is willing to pay. Working with an experienced advisor to establish a range of value is particularly valuable in a third-party sale scenario. Advisors have access to comparable transaction data and can provide insight into the marketability of your business, including whether there are specific improvements you can make in the near term to increase buyer interest.

Insider Transfers

When transferring ownership to a key employee or family member, the valuation takes on additional complexity. You need to understand both the lowest defensible value and the maximum possible value. The lowest defensible value allows you to take advantage of certain tax efficiencies, while the maximum value helps you and your client understand the full financial picture—including what might be left on the table by choosing an insider transfer over a third-party sale.

Business Continuity

Business value is critically important in continuity planning—the strategies that protect the business and its owners in the event of death or disability. Buy-sell agreements, in particular, depend on an accurate and current valuation.

Common Pitfalls

There are several pitfalls that business owners and their advisors should be aware of when it comes to business valuation:

Valuation conducted in a vacuum. When the valuation specialist does not have a clear understanding of why the valuation is needed and how it will be used, the resulting report may not serve its intended purpose. The more context the specialist has, the more useful the deliverable will be.

Misaligned expectations. Business owners sometimes have expectations about the value of their business that do not match reality. While the rise of private equity and increased industry discussion of valuation trends has helped close this gap, it is still important to prepare for the possibility that the valuation may come in lower than expected.

Valuation anxiety. Some owners are hesitant to obtain a valuation because they are afraid of what the number will reveal. This is particularly common among owners who are highly dependent on their business value to meet their personal financial needs. Knowledge is power, and a clear-eyed understanding of your current value puts you in the best position to make productive decisions.

Planning strategies that affect value. Certain planning strategies can impact business value in ways that may not be immediately obvious. For example, implementing restrictive covenants for key employees may increase value, while a large deferred compensation program may decrease it. It is important to coordinate with your valuation specialist when implementing any planning technique that could affect the company’s value.

Protect your legacy and financial future. Take the first step today by contacting Summit M&A Advisors to schedule a consultation.

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As a business owner, your employees put added stock into the things you say, how you say them, and when you say them. This is why it’s extremely important to avoid making empty promises based on good intentions.

Let’s look at some ways that you can position yourself to minimize communication risks within your business.

Write Everything Down

Business plans, exit plans, incentive plans: if you have a plan to do something, it’s best to put it in writing for several reasons.

First, writing things down can help you standardize. Whether it’s a goal you’re pursuing, a development plan for an employee, or something else, having it in writing can help ensure that everyone is singing from the same songbook.

Second, writing things down can protect you against bad actors. Though we all want to believe that employees, vendors, and even competitors will always try to do the right thing, in reality, that’s not always the case. Having receipts that show what you are trying to do and how you intend to do it, and create a running tally of how you got from Point A to Point B can help protect you against bad actors.

Finally, putting things in writing makes it much more difficult for people to interpret them incorrectly.

In the context of Exit Planning, this can be important in determining whether your business exit is successful. A written plan not only guides your strategies toward a successful exit but also helps protect you against claims that other people might make about your business.

For example, you may have told one of your children that you intend to sell the business to them when the time comes. But over the years, you may have found that that child is too irresponsible or untalented to take over the business in ways that would ensure your financial security and successful exit from the business.

A written plan stating how you want to transfer your ownership can help protect you if that child were to try to claim that you promised them something that you had no intention of delivering on.

Avoid Trying to Please Everyone

Business owners are human beings, and many of them want their employees to like them. However, there is such a thing as being too conscientious to employees.

For instance, imagine that your best employee has become disgruntled because he doesn’t feel that you’re acknowledging his contributions enough. In this case, it may be tempting to flatter this employee with promises of professional growth, higher salaries, and other career development opportunities—if only to get him to stop complaining.

But in a world where everyone is watching everyone and everyone is recording everything, this can put you in harm’s way.

Sometimes, the hardest thing about owning a business is telling the people who help you make the business successful that they’re wrong, that they’re irrational, or that their expectations don’t align with the company’s mission. A failure to be realistic could have long-term effects on your business’ success.

This doesn’t mean that you need to rule with an iron fist. But it does mean that you need to consider the ramifications of short-term salves when conflicts arise.

In terms of your business exit, this may translate to a need for a management team who can insulate you from competing interests within your own business. For example, you may have two employees gunning for the same promotion with only one position to give out. A management team can help you determine which employee is truly the best fit while helping you navigate the fallout of delivering the bad news to the employee who doesn’t get the promotion.

Leverage Experts in the Law

In the worst cases, any number of people may try to use the law against you, whether it’s frivolous or not, to extract something from you. Without a team of experts who can help you navigate the law in the context your business exists, you may find that fighting off legal claims is engulfing a majority of your time.

Again, it doesn’t necessarily matter whether someone has legal ground to stand on. A vindictive employee, customer, or family member can simply try to grind you and your business down for no other reason than to harm you based on something you said or did that they didn’t like.

Having a team of experts in the law as a safety net can help you not only reduce the likelihood of these situations taking control of your business life but also more readily address them when they arise.

For example, your business may implement an employee’s idea that spurs growth within the company. If that employee isn’t satisfied with the recognition that they get for their idea, they may choose to make life difficult for you by suing you for intellectual property infringement.

Whether they have the grounds to do so successfully isn’t necessarily relevant. If you don’t have a team of experts who can tell you how to react, how to respond, and what to do, you may end up spending more time and money than you ever anticipated trying to solve a problem that you thought you’d never, ever have.

Stay Vigilant

Your business is likely your livelihood. Your business likely supports more people than just you. As such, it is so important to ensure that you are doing everything in your power to protect your business against bad actors.

The words you say and the actions you take have an outsized influence on your employees, your customers, and your industry. Positioning yourself to address unexpected problems that come from the things that you say or do can help you protect your business, your legacy, and your future financial security.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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Co-owned businesses come with numerous complexities. One of the biggest challenges for co-owners is determining how to approach the exit of another co-owner, especially when that co-owner cannot or will not exit gracefully.

Let’s look at a fictional but representative story about how one co-owned business successfully managed to tie up loose ends before one owner was forced to exit.

Ominous Signs

Frances Nguyen and Frank Billings had been equal co-owners of their business for over 50 years. They each leveraged the other’s strengths to cover for their weaknesses. But recently, Frances began to recognize concerning signs in Frank’s behavior that she had seen in her own family before.

He was increasingly forgetful and easily agitated, despite his normally even-keel personality. Frank’s typical punctuality had begun to turn into lateness and even absence from important meetings.

Though it was difficult, she urged Frank to visit a doctor, something he had not done since they founded the business together. After several batteries of tests, Frank’s doctors confirmed Frances’s fears: Frank was showing early signs of dementia.

Frank still had the lucidity to understand how his diagnosis affected more than just him. The business relied on both Frank and Frances to function, and up to that point, they had had no plans to change that setup.

Though they kept the news quiet among their employees, Frank and Frances began to plan for a future without Frank. Their problem was that they had no idea where to start.

Remember Me

Frank had always wanted to be remembered as an owner that his employees loved working for. But without a plan for the business to run without him, his legacy was in doubt.

Frank and Frances met with their Advisor Team to determine what they should do with the business to keep it running well despite Frank’s declining health.

Their Exit Planning Advisor, Chuck, asked them a question that got to the heart of the matter: “What is your worst fear about this situation?”

Both answered simultaneously: “Our employees will abandon ship if they knew one of us was in trouble.”

“I fear that more than I fear dying,” Frank added.

“We know that we treat our people well and support their lifestyles better than any of our competitors,” Frances said. “We don’t want them to think that we can no longer do that.”

“And I don’t want to be remembered as someone who let my people down,” Frank said.

Chuck laid out an overarching plan that he thought would fulfill the three biggest needs that Frank and Frances had:

• Ensuring that Frank could exit the business and tend to his health without having to worry about his finances.
• Keeping the business running well and employees happy after Frank left.
• Positioning Frances to eventually exit smoothly on her terms.

Protecting the Legacy

The first step they took was determining how to replace Frank. Frances was both unwilling and unable to take over Frank’s role. She also worried how employees would respond if they began hiring outsiders to take on more responsibilities. And she wasn’t sure that any single person within the company could replace Frank.

Their Advisor Team reassured them that they did not need to necessarily find one person to replace Frank. Instead, they recommended building a management team that could take over Frank’s responsibilities seamlessly.

Frank and Frances worked closely with the Advisor Team to identify potential candidates for management internally. When they realized that they would need more than internal employees to replace Frank, they extended their search outside the company.

At this point, it was impossible to keep Frank’s health a secret. But much to their surprise, Frank and Frances found that their employees were supportive of their decisions because they communicated the situation so clearly with help from their Advisor Team.

After establishing a next-level management team to replace Frank, the Advisor Team worked to ensure that Frank could maintain a pay structure that would support his health care needs even after he left the business.

Then, the Advisor Team helped Frank leverage both his income and personal finances to ensure that he was as comfortable as possible as he transitioned out of the business.

Finally, at Frances’s urging, the Advisor Team helped set up an additional fund through the business that would support Frank’s family as his health declined.

Silver Linings

With help from her Advisor Team, Frances managed to onboard and train the next-level managers who would take over for Frank. These managers successfully maintained the company’s performance. This positioned Frank to ease his way out of the business without disrupting operations. But there were bumps in the road.

Frank’s health declined more quickly than anyone had anticipated. Some business relationships that Frank had fostered over 50 years deteriorated in the near term: During the transition, the business lost two of its 10 largest clients.

And just when things seems like they couldn’t get worse, Frank suffered a debilitating stroke in the middle of their planning.

But because they had established the foundation of an Exit Plan, the business did not fail. Though it was rough sailing in the months immediately following Frank’s stroke, the next-level management team helped the company pull through and begin growing again. Frances continued to run her portion of the business while her next-level managers purchased shares of Frank’s ownership.

Frances maintained majority ownership, per Frank’s wishes. And the next-level managers continued to perform so well that Frances could begin planning her exit on her terms.

Start Before It’s Too Late

Like Frank and Frances, many business owners react to situations instead of tackling them proactively. And it’s understandable: Nobody thinks something terrible is going to happen to them until it happens to them.

But for co-owned businesses, a failure to have a plan can reverberate throughout the entire company. Fortunately, you can begin planning for a co-owners unexpected exit before it’s too late.

Though the transition wasn’t perfect, Frank and Frances managed to make a bad situation into a situation that they could overcome. With help from their Advisor Team and next-level managers, they were able to begin transitioning Frank out of ownership without disrupting company operations and employee morale.

There were certainly rough times, but Frank and Frances’s planning protected the company’s operations, eventually led to even more growth, and fulfilled Frank’s wish to be remembered as an owner that employees loved to work for.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you have questions on this topic, we can help with more information or a referral to another experienced professional.

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