The "Boots First" Exit Plan - default choice in Exit Planning
Posted on Thu, Dec 01, 2011
by Jane Johnson, CPA, CMA, Certified Business Exit Consultant
Providing CFO & Exit Planning Services throughout the Greater Boston Area
The sad reality is that most Baby Boomer business owners do not have a plan for the exit or succession of their business, so the Boots First strategy will be their default. This means that their outdated will or trust or, worse yet, the estate distribution laws (and tax rates) will likely apply to their estate - business assets and all.
How to Proactively Choose the Boots First Exit
One of the common misconceptions is that exit planning is only about selling a business. This is simply not the case. The truth is that exit planning is all about learning the options for an exit and finding a customized solution that works best for the owner, the company, and his or her family.
If working in the business until they cannot work anymore sounds like the best strategy for an owner, then we suggest proactively planning to ensure the best possible outcome. The following is a list of potential negative outcomes that can result from an unplanned Boots First exit. An owner should review this list and identify the things that he or she does not want to be remembered for and then plan accordingly:
• Leaving a mess for a spouse
• Paying excessive taxes
• Having the business fail unintentionally
• Having family members fight over the company
• Having future ownership transfer to family members who don't want it
• Having wealth disappear to advisory fees
Potential Solutions for a Boots First Exit Strategy
We can't address everything on this list in one newsletter, but one of the most important items that an owner can address is contingency and estate planning. By developing or updating their estate plan, an owner can minimize their tax bill and state their intentions for the future ownership of the business. Hopefully the named successor to the business actually wants to own it, run it, and has the skills to do so. Be sure to make certain that the proper amount of insurance is purchased, held and titled properly (this includes disability insurance). In doing so, an owner can at least provide for his or her family with insurance proceeds to compensate for the loss of a business income and the dissipation of wealth that occurs from leaving an illiquid business asset at his or her time of death.
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Beyond estate and insurance planning, the next best thing that an owner can do is start moving more and more assets out of the company, growing his or her personal liquid wealth. This diversification can help support an owner's personal lifestyle and any form of legacy planning or gifting that he or she would like to undertake.
However, if the owner wants the business to continue beyond his or her exit, they must be careful not to drain too many assets from the company. Instead, they may want to consider internal ownership transfers, such as a management buyout (MBO) or an Employee Stock Ownership Plan (ESOP) that can provide tax advantaged strategies for wealth transfer AND allow the owner to retain control over the company operations while they groom a successor.
An Owner Needs to Understand All the Options
If an owner is going to choose the Boots First method of exiting a business, he or she needs to take the time to fully plan for and understand the implications of this choice. Many business owners who take time to reflect on their decision realize that they have worked too long and too hard on their business not to reap the financial rewards or not to have a say in how that business will continue into the future!
Pinnacle Equity Solutions © 2011
About the Author:
Jane Johnson is a CPA, CMA, Certified Business Exit Consultant Providing CFO & Exit Planning Services throughout the Greater Boston Area
The Successful Transition Planning Institute of Cambridge, MA, STPI provides tools and training to advisors so they may help successful business owners, executives and professionals learn how to "Think", "Live" and "Decide" what to do with their companies and careers, in order to plan for a dynamic, new life. (see video).