Business Exit Planning Failures

Most business planning is backwards.   It involves a series of transactions in reaction to immediate needs and concerns, rather than the product of any real planning.

Owners often set up the business thinking of it as a stream of income rather than as an asset.  So, they unthinkingly choose to establish the business as an S-corporation in order to reduce self-employment taxes, and thereby limit planning options, and create a serious capital gains issue when the time comes to exit the business.  If they would, as Steven Covey suggests, “Begin with the end in mind”, the plan might produce better lifetime results.

Similarly, owners will sell their business, and then start to think about how they will live off the proceeds.  Whatever is left over when they die is the family’s legacy.  In our view, owners should not think about selling a business until after financial and legacy planning is completed.

Backwards planning often results is missed opportunities, higher taxes, and less money in the pockets of owners and their families.  For example, studies have shown that putting proceeds of the sales of a business into a grantor trust will generate much less for the family than putting the stock into the trust before the sale.  However, the favorable tax rules involving grantor trusts are under attack, and several recent Presidential Budget Proposals (“Green Books”) have called for legislation to change those rules.  It is not clear how long this opportunity will be available.

It is critical that business owners educate themselves about their options before the window closes.