Suzie Eyrich, BMO Private Bank, Financial Planner

Exit strategy: Don’t gamble with your business—start planning now for the inevitable sale or family succession

Dec. 7, 2018
Part of NTDA 2018 Convention coverage: Wealth Planning for the Family Business Owner

In his chart-topping single “The Gambler,” country music Hall of Famer Kenny Rogers suggests you’ve got to know when to hold ’em, when to fold ’em, when to walk away, and when to run.

Ostensibly about poker, the song deals out metaphorical lessons about handling anything life throws at us.

For many business owners, walking away is the most difficult call to make.

That’s why the National Trailer Dealers Association (NTDA) asked Suzie Eyrich, a certified financial planner with BMO Private Bank, to play the classic tune’s eponymous role in her session “Wealth Planning for the Business Owner”.

Eyrich delivered apt advice on exit-strategy planning, including when to start, what to incorporate and whom to include.

Everyone leaves

Eyrich’s first recommendation: Plan to transition out of the business today.

According to a 2016 Business Owner Survey by Business Enterprise Institute, 75% of business owners would exit immediately if their security were assured, but 38% have done nothing to prepare for an exit—even though 100% will leave their business at some point, willingly or otherwise.

So assemble a team of business consultants, valuation experts, financial/insurance advisors, and estate planning attorneys now in order to be ready when the times comes, whether its two or 10 years away.

“You need time to formulate a plan and make sure that it works,” Eyrich said. “If you’re thinking about bringing a family member in … you want to be able to take time to give them your values—bring them up (and) give them some management skills—and that takes a lot of time.”

Financial freedom

One key factor is the owner’s financial needs post-exit.

A thorough plan involves budgeting, risk and investment management and planning for taxes, retirement and the estate.

Eyrich says to consider ongoing expenses, such as retirement plans and family needing support, and how to replace lost income through consulting, real estate leasing, asset transfers and savings.

“A lot of folks do consulting agreements,” she said. “They’ll stay on for three to five years, so they’re getting a consistent income stream, and it makes that transition from working every day … a little bit easier, but then they also have a source of income for at least the next five years that provides a safety net.”

Accounting for taxes

Planning for the taxes involved with selling a business is critical.

So it’s important to understand the business’ real market value—often different from its perceived or sentimental value—and look for ways to mitigate income taxes through charitable trusts, donor advised funds, installment sales, asset vs. stock sale negotiations and other deferred vehicles.

Opportunity zones are an exciting area in tax reform, Eyrich said, providing a new avenue for investing capital gains.

“If you put that investment into an opportunity-zone fund, you can defer the gains up to 10 years, and then with … that new investment you’re now in, you could potentially have zero gains on it,” Eyrich said

Also, update estate plans, wills, trusts and power of attorney, and make sure they match business documents.

Sell or succession

Many owners want to keep their business in the family after they’re gone, but that’s not always preferred, or possible.

If considering selling, for whatever reason—boredom, frustration, partnership dispute, familial disinterest, or maybe it’s just time—Eyrich suggests thinking about hiring a qualified advisor, reviewing potential buyers, and accounting for timing (a sale can take anywhere from three months to two years) and valuation, which is essential to completing different aspects of an exit strategy.

“Valuation is key—key, key, key—and I can’t stress this enough, because I see so many business owners who don’t know what the value is, or they think they know what the value is, but the market doesn’t agree,” Eyrich said.

If keeping the business in the family, make sure the successor is prepared for the great responsibility, with the right leadership skills and financial savvy, and remember, families are complicated, and so is dividing up assets in a way that makes everyone happy—sometimes easier said than done.

“Are there are other people in your family who will be resentful because they’re not taking it on?” Eyrich said. “And there’s also equalization. So if you have a lot of family, and one person is getting the value of this business … what about the rest of your family? Do you want to leave a certain legacy and make sure everyone is equal?”

Strategic transition

When transferring ownership, look at all the options that make the most financial sense, including an employee stock ownership plan (ESOP), a commonly used retirement tool that can provide tax advantages.

“Start talking to (experts) today,” Eyrich said. “Even if it’s not going to be for 10 years, start planning today to see what you need to do to get to that point, because something might happen. You might have a health issue, where when you thought it was 10 years down the road, it now becomes one or two years.”