Do You Have an Exit Strategy for Your Business?

All business owner’s know the importance of keeping an eye on your company’s income and expenses and applicable tax breaks. But are you also looking at your own financial future and how you will exit the business when the time comes? It may be time to create an exit strategy.

Buy-sell agreement

If your business has more than one owner, a buy-sell agreement can be an important tool. The agreement controls what happens to the business if a specified event occurs, such as an owner’s retirement, disability, or death. A well-drafted agreement provides a ready market for the departing owner’s interest in the business and prescribes a method for setting a price for that interest. It also allows business continuity by preventing disagreements caused by new owners.

A key issue with any buy-sell agreement is providing the buyer(s) with a means of funding the purchase. Life or disability insurance often helps fulfill this need and can give rise to several tax issues and opportunities. One of the biggest advantages of life insurance as a funding method is that proceeds generally are excluded from the beneficiary’s taxable income, provided certain conditions are met. 

Succession within the family

You can pass your business on to family members by giving them interests, selling them interests, or doing some of each. Be sure to consider your income needs, the tax consequences, and how family members feel about taking over your business. 

Under the annual gift tax exclusion, you can currently gift up to $15,000 of ownership interests without using any of your lifetime gift and estate tax exemption. Valuation discounts may further reduce the taxable value of the gift. 

With the gift and estate tax exemption approximately doubled through 2025 ($11.4 million for 2019), gift and estate taxes may be less of a concern for some business owners. But others may want to make substantial transfers now to take maximum advantage of the high exemption. What’s right for you will depend on the value of your business and your timeline for transferring ownership. 

Get started now

To succeed, your exit strategy will require planning well in advance of retirement or any other reason for ownership transition, and you may want to start with a business valuation. Please contact us for help.

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