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Top 5 Business Exit Planning Mistakes We See Thumbnail

Top 5 Business Exit Planning Mistakes We See

By Trent Derrick, CMT®

If you’re a business owner, you likely have most of your wealth tied up in your business. This is why it’s critical to plan ahead and think about your business exit strategy ahead of time to safeguard the asset you’ve spent all these years building. 

At Legacy Wealth Management, we’ve assisted countless business owners like yourself in navigating the intricacies of succession planning. To help you prepare for the future, here are the top five business exit planning mistakes we often encounter in our work with clients like you.

1. Misunderstanding What Makes Your Business Valuable

Putting a price tag on your family business isn’t as simple as you might think. While you may have an emotional connection to the business you’ve built, your buyer likely doesn’t. When you’re not clear on what makes your business valuable, you could undervalue or overvalue your business.

To better understand how much value your business holds, you’ll want to consider these factors: 

  • Customer base
  • Cash flow
  • A strong management team
  • Physical assets
  • Intellectual property and digital assets

These are just some of the essential parts of your business that a potential buyer might include in their decision-making process of purchasing your company. For an impartial valuation of your business, start with an informal business valuation. 

Doing an informal version of this step first could be less expensive than the formal version and provide you with a basis to work from. With a general idea of how much your business is worth, you can identify potential gaps and make necessary improvements to increase the business value to reach your monetary goals from the sale. 

2. Delayed Exit Planning

A costly mistake many business owners make is putting off their exit planning. The components of a successful exit plan include several moving parts that require an adequate amount of time to institute. 

  • Strategizing and implementing the plan
  • Getting the most value from your business
  • Mitigating taxes
  • Aligning your personal wealth with income sources outside of the business. 

Even if you don’t plan on stepping back from your business anytime soon, you can take some pressure off your future self by exit planning well ahead of time. Some tax-efficient strategies for selling a business require over a year or two of advanced exit planning. Even without a sale in the immediate future, it’s never too early to meet with experienced advisors. 

3. Being Irreplaceable in Your Business

While it feels good to be needed, a major selling point of your business is how transferable it is to new ownership. Self-managing companies are more marketable to potential buyers since the owner is not critical to the business’s future viability. You’ll want to assess how your business runs from these standpoints to determine how transferable your business is: 

  • Are you the face of your business?
  • How much responsibility do you carry on a daily basis?
  • Do you have a strong dependable management team?
  • Does your business have established processes and systems in place?
  • Are you the only one with specialized skills or knowledge needed to run the business?

It could just be time to move on to the next phase of your life, or a devastating event could have rendered you unable to continue managing your business. Either way, a successful exit plan facilitates the smooth transfer or effective sale of your business while retaining its value—another reason why starting sooner rather than later is important.

4. Not Having a Clear Reason for Selling

As a business owner, you might be more focused on the day-to-day rather than the long-term view of your business. While the proceeds from the sale are an obvious benefit of exit planning that leads to a sale, you may want to consider the other reasons behind the decision. 

If financial security is the only reason you’re looking to sell, you could work with a financial planner to identify other methods that don’t involve selling. However, if health or family reasons are behind your exit, then it may be a valid choice. Without a clear understanding of why you want to exit your business, you could regret your decision down the line. 

5. Not Seeking Professional Assistance

Working with a financial advisor you trust is a great way to start the exit planning or succession planning process, as preparing for the sale of your business takes careful consideration around multiple aspects of your company. 

The team behind you (or lack thereof) can make or break your business sale. In addition to the skill and knowledge of a financial advisor, you may need to involve an attorney, business broker, insurance professional, and a CPA to assist in the various parts of the sale or business transfer. 

Ease the Burden of Selling a Business 

Deciding to sell or transfer your business is a big decision that requires careful consideration. At Legacy Wealth Management, we understand the complexities and nuances involved in establishing an exit strategy for your business. As dedicated professionals committed to prioritizing your best interests, our goal is to ease the burden of planning for your financial future. If you’re looking to strategize your succession plan or initiate exit planning, email me at trent@legacywm.com.

About Trent

Trent Derrick is a financial advisor and Chief Market Technician at Legacy Wealth Management. He is passionate about the value small businesses bring to their communities and specializes in serving small business owners by providing seamless financial advisory services tailored to their financial needs, including tax planning strategies, cash flow management, and retirement planning. Trent obtained his bachelor’s degree from the College of Charleston, studied economics at the University of South Carolina, Columbia, and is a Chartered Market Technician® (CMT®) professional. Outside of the office, he serves as a guest lecturer for the College of Charleston’s MBA program and acts as chairman of the Market Technician Association’s Charleston chapter. To learn more about Trent, connect with him on LinkedIn.

The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. 

Legacy Wealth Management and LPL Financial do not offer tax advice or services.