Most business owners are good at building. They build their brand and spend years growing the business and managing day-to-day operations, but too often they don’t give the same attention to their exit plan.
On this episode of Business Trends Today, we’re joined by Lyndon L. Davis, Founder and CEO of Nayhife Wealth Management. With more than 20 years of experience helping business owners navigate major financial decisions, Davis works closely with entrepreneurs on the shift from building wealth to protecting a long-term legacy. He says owners who haven’t started planning are already behind.
Why an exit plan is often overlooked
Most business owners agree that having an exit plan is important, but Davis says research shows that just over half give it meaningful attention. Davis says 63% think it’s too early to plan, and 45% say they are too busy.
"99% of business owners agree that having an exit strategy is important, but only 53% give it little to no attention."
Davis says there are three main reasons business owners fail to make a transition plan. The first reason he calls “identity fusion.” Davis says business owners are so interconnected with their business that the thought of stepping away is personal.
“They are their business. So if the business is going out of business, so it’s ending, it feels as if they’re ending,” Davis said.
The second he call, “operational overwhelm.” Managing too many responsibilities leaves little room for long-term thinking, he says. The things the business needs now always come first, leaving little time for future planning.
The third is a knowledge gap. That can be too little information, or too much. Those who have done some research can feel intimidated by the complexity of the issue. Meanwhile, those who haven’t looked into it at all don’t know where to begin. In either case, nothing gets done, and the window for thoughtful planning gets smaller.
The mistakes owners make when they finally do plan
When owners do get serious about exit planning, Davis says they often face a new set of challenges.
They often rely on outdated business valuations. A valuation done years ago may no longer reflect what the business is actually worth. If a buy-sell agreement is tied to that old number, it can lead to disputes.
“You value the business today, but now it’s five years later. Did the business increase? Did it decrease? Does that buy-sell agreement actually reflect that increase or that decrease?” Davis said.
The second mistake is a lack of funding coordination. Having the legal framework to buy out a partner doesn’t mean much without the capital in place to execute it.
The third is missing or rigid trigger events in the agreement. Most buy-sell agreements are built around a specific set of circumstances. But life-changing events like divorce, disability, or bankruptcy, can disrupt agreements that seemed airtight.
Why your buy-sell agreement may not be enough
Just because a business has a buy-sell agreement in place doesn’t mean their exit strategy is solid. Davis says that’s where many business owners start to run into issues when the time to transition comes.
The most common issue is value. If a business has grown since the agreement was drafted, the owner on the receiving end of a buyout may feel shortchanged.
“The value of the business now doubled but I’m getting last year’s or a decade ago pricing. That never ever works,” Davis said.
Ownership changes create another issue. A partner who was single when the agreement was signed may now be married, and a spouse who spent years contributing to the business may have a claim on the proceeds.
Regulatory changes create a third potential problem. Rules in place when an agreement was drafted may no longer align with current federal, state, or local requirements.
Davis says all of these factors drive up the cost and complexity of an exit that could have been straightforward with routine upkeep.
Selling to an outside buyer vs. keeping it in the family
A big decision many business owners face is whether they want to sell their business to someone else or keep it in the family. Both paths come with their own unique challenges.
An outside sale usually means a large payment upfront. A family transfer typically means getting paid out in smaller amounts over time. That difference catches a lot of owners off guard.
Tax issues are another factor. For family transfers there are gifting strategies that can lower estate and tax liability. Capital gains apply in both cases, but a well-structured family deal can reduce what the owner owes overall.
Owners should also consider family dynamics, and the impact their decision could have on their relationships.
“Sometimes the company survives, but the relationship with siblings doesn’t always survive,” Davis said.
Selling to an outside buyer is cleaner, Davis says. If there is a dispute, lawyers handle it. But in a family deal those disputes can follow the owner to holidays, birthdays, and family gatherings.
What the tax code says right now, and why it matters
Tax planning is one of the most important and time-sensitive parts of the puzzle, Davis says. The tax code is always changing, and owners who wait to take action risk missing opportunities.
"Taxes is that wild card. It's that funky gray area. Because you have some things in the tax code now that might be favorable, but Congress is Congress and those things may go away."
Davis points to three tax situations business owners need to look at now. The 20% qualified business income deduction, the 100% bonus depreciation on capital expenditures, and the Section 30C alternative fuel credit, which expires next month.
Retirement rules have also changed. Owners who earned more than $150,000 the previous year and are between ages 60 and 63 must now route catch-up retirement contributions to a Roth account. That money can no longer go in pre-tax.
“Stay abreast, and if you’re not able to stay abreast, hire someone, your tax professional, the financial advisor, hire someone who can take advantage of that,” Davis said.
For business owners who have been putting off the conversation, Davis says the window for thoughtful planning is always shorter than it seems. Valuations change, tax provisions expire, and agreements drafted years ago may no longer hold up. The owners who fare best in a transition are the ones who started preparing before they had to.
ASBN, from startup to success, we are your go-to resource for small business news, expert advice, information, and event coverage.
