Astute business owners understand the importance of planning their exits in the early start-up stages of their companies before they become mired in the day-to-day operations and constant pursuit of growth and profitability. When built into a long-term business strategy, a well-thought-out succession plan can provide a valuable timeline for maximizing business value and preparing your organization for success long after your eventual and inevitable departure.
It is vital to consider succession planning an ongoing process that you continually visit and update to meet your evolving personal circumstances and financial goals. These frequent check-ins may also help prompt discussions about new growth-building initiatives and strategies you may need to take to minimize business risks and support higher business valuations. By starting the planning process early, you also have more time to address a broad range of potential issues and adjust your plan for a smooth transition when it comes time to sell.
When it comes time to implement your succession plan, there are some questions you should ask yourself to improve the odds of a smooth transition and achieve your ultimate goals.
Where would I like to be personally and financially in the next three to five years?
Take the time to think about your short-term needs and wishes and what you need to feel fulfilled after your exit. They may differ from what they were five or ten years ago, especially if there was a market downturn or the government imposed stricter regulations on your industry. Similarly, your hopes and dreams for the future may have changed considerably if you are divorced, widowed, or your health has declined. Perhaps you want to start a new business venture, travel more or work fewer hours to ease into retirement. Once you have the answers to these questions, you can better assess your finances and the likelihood of living out your post-exit dreams.
What is the value of my business?
Most entrepreneurs’ businesses are their largest single asset, representing a significant portion of their wealth. Consequently, the hope for a high valuation by an accredited appraiser is critical when considering a sale. After all, a company’s value involves far more than its cash flow, assets, profits, liabilities and losses. Other critical factors to consider include the company’s management team, the state of the industry in which the business operates, the performance of its competitors, market risks and other macroeconomic trends outside the business owner’s control. Only with this information can a business owner determine the most suitable time to put their company up for sale or enhance its value before taking it to market.
How will a sale of my business affect my short and long-term tax liabilities?
While business owners looking to exit their companies will focus most of their attention on the sales price and the potential proceeds they may reap from a sale, they must not forget how such a transaction will impact their estate plans and tax efficiency.
Depending on where the business is located, its structure, the terms of the sale and whether it involves a sale of assets or stock, the proceeds from a sale could trigger capital gains tax and income tax at the federal and state levels. Moreover, the additional liquidity may increase the value of the seller’s taxable estate to the point that it exceeds the federal estate tax exemption, which is $13.61 million in 2024, or $27.22 million for a married couple. This is a critical consideration at the present time when the law calls for the exemption to be cut in half at the end of 2025, exposing many more taxpayers to an estate tax that can be imposed at a rate as high as 40 percent. Depending on a business owner’s net worth and the value of their company, it behooves them to begin estate planning early and consider using trusts and gifting strategies before completing a sale to reduce their taxable estate.
Having a succession plan in place years or even decades before you exit a business can help you avoid many of the common frustrations that can come with that transition and protect you and your business against potential financial losses and reputational damage. It also allows you to plan for how you will spend your time away from the company you built and how you will invest your proceeds for tax efficiency and maximum growth.
About the Author: Eric Zeitlin is managing director of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
 Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
 Eric Zeitlin is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Posted on August 21, 2024