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Seven Reasons Why Having No Exit Plan is Bad for Business

oswaldcompanies April 19, 2023
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Nearly all (99.9%) of American companies are small businesses, according to a study by the U.S. Chamber of Commerce. Yet of those small-business owners have a plan to exit their companies – even as many of them plan to retire in the next decade.

This could lead to valuable time and resources spent dealing with problems as they arise, passing up growth opportunities, or worse – the business shutting down entirely. However, it’s never too late to start planning.

Start the process by considering the following.

  1. If your business is your retirement plan, can you:
    1. Sell to a third party at fair market value?
    2. Sell the business on your timetable?
    3. Get a lump sum cash payment from a potential buyer?
    4. Have secured payment terms, such as how you will get paid and when.
  2. If the value has not been locked in by the agreement, you leave your business’s future to chance.
    1. Would you want fair market value to be negotiated by the IRS for estate tax purposes based on the date of your death?
    2. For estate planning purposes, are you prepared if the sale proceeds are significantly less than fair market value?
  3. Is the investment in your business protected from the death or premature departure of a key employee?
    1. If that person isn’t bound by a legal agreement, will they choose to remain with your business after it is transferred to a new owner?
    2. Does the business have enough money to cover expenses such as loss of revenue, hiring costs and loss of job functions linked to the unexpected death of a key employee?
  4. Has enough money been set aside to complete the transfer of the business to another owner or employee?
  5. Are spousal rights protected in the terms of the buy-sell agreement? If not, this could open the door to divorce court valuation.
  6. Can an executor decide what should be done with the business?
  7. Without proper planning, how likely is it that a motivated seller or seller in liquidation will be able to receive full market value.

Pull quote: Not having a current buy-sell agreement can create opportunity for disputes between owners, which can be expensive and cause delays.

Who is most likely to not have an exit plan?

  • Full owners with no family connections to the business
  • Small, family owned businesses with one child
  • Multiple owners who just haven’t gotten around to creating an exit plan

What are the options?

  • Sell a minor interest in the business to prospective key employees. Transition them into the running the business.
  • Execute a buy-sell agreement with a guaranteed buyer at a guaranteed price when the time is right.

The advisors at Oswald can help you navigate this often-difficult process, with an eye on mapping the best future for your business.


For more information, visit our Life Insurance page or contact us here.

 

(Sources: Principal Business Owner Insights, U.S. Chamber of Commerce)

Note: This communication is for informational purposes only. Although every reasonable effort is made to present current and accurate information, Oswald makes no guarantees of any kind and cannot be held liable for any outdated or incorrect information. View our communications policy.