Written by Chetan Dogra, CPA
You’ve at last succeeded and now it’s time for exit planning. Your baby is all grown up and prepared for you to move on after decades of care and investment. Maybe getting older is making you slow down and think about living a new kind of lifestyle. Or perhaps you simply feel ready to take on the next assignment. Success will hinge on negotiating some treacherous terrain in any case.
Typical Errors & Pitfalls in Exit Planning
1. Overestimating your business value
Overestimating the value of the company is the largest error owners make when planning their leave.
It’s normal to place a great value on those extended evenings spent second-guessing every choice. However, placing an excessively high value on the company may prevent you from finding the ideal buyer when you do decide to sell.
On the other hand, after business valuation some business owners deceive themselves into believing they are willing to sell at a particular price, but when they receive an offer, the price increases. The owner has not been completely honest with herself about whether she is actually prepared to leave the company, which is what is at play in this situation.
2. Not fully accounting for the tax effects of a sale
You may receive a sizeable sum of money through the sale of your company – money that is sizeable and taxed. It takes some careful planning to keep more of it for you and yours and lose less of it to Uncle Sam. Planning should ideally begin a few years before you sell so you and your tax advisors have enough time to establish and implement a tax strategy that yields the best results. This could involve taking into account things like built-in gains taxes, which might work in your favor or end up costing you literally millions more in taxes than you had anticipated.
3. Allowing financial planning to lapse after exit planning
After closing your firm, avoid the error of neglecting your finances or tax status. Through investments, estate planning, and careful handling of retirement account contributions or distributions when the time comes, many people have significant tax savings options. The money you have worked so hard to achieve can continue to work for you with a little advance forethought. Even after you sell your company, keep up your annual or biannual meetings with your CPA, investment advisors, etc. to fully take advantage of the opportunities in areas like trust planning, gift planning, philanthropic plans, retirement account strategies, etc.
But there is a way to overcome these mistakes and keep things on track when exiting your business. Stay tuned for our next blog How to Make An Exit Plan with Powerful Accounting Services to find out.