Are you planning to sell your business to help build your wealth and fund your retirement? It’s important to have a long-term, strategic exit plan even when you aren’t planning to sell your business right away.
Step 1: Understand Your Taxes
As you create an exit plan, one of the most important aspects of your business to have organized and running smoothly is your taxes. Not having your taxes in good shape can throw up a red flag for potential buyers, not to mention you may be missing out on potential tax advantages.
Depending on your business, these could be income taxes, sales taxes, or any other type of outstanding tax obligations. Even if you’re doing everything right, you need to understand your business taxes inside and out so you can be prepared for buyer questions.
Step 2: Understand Your Number
I often talk about “finding your number,” which is understanding the amount of money you need to both cover your expenses and live a fulfilling and comfortable life.
If you plan to fund your retirement with the sale of your business, then you need to know how much money you need in order to live that comfortable, fulfilling life in retirement. That will determine how much money you need to make from your business. If your business is paying for costs you’ll have to take on yourself, like health insurance, you also need to be sure you’ll have enough to continue to fund those things.
If you don’t think your business will be able to reach that target number, then the next step is looking at other options. Do you have time to diversify your investments?
If you are still growing your business, how can you make it profitable enough to meet that number when you are ready to sell? Can you add new products, reduce costs, or increase the value of your business in other ways?
Step 3: Consider Your Debt and Equity
If selling your business is farther away, you can build personal liquidity by taking on debt. This gives you the option of diversifying your wealth in potentially higher growth options, and it helps you build wealth away from your main source of income. Of course, you must be sure the business can easily afford the debt payments.
Alternatively, you can bring in a business partner. While this will decrease your equity in terms of the eventual sale, you will be able to structure your assets for additional growth without adding debt.
Step 4: Consider Your Structure
We can assume that as you sell your business, one of your main goals will be to make as much money as possible from that sale. But that’s not just about the sticker price. It’s also about how much of that sale value ends up in your bank account.
That means we are back to considering taxes. The most advantageous tax treatment is capital gains, rather than ordinary income. There are structures that can shift more into capital gains tax treatment.
Making an exit plan is a complicated process that should start years in advance of when you plan to sell your business. A professional can help you break things down and work through your goals and the steps you need to take. And once you make the sale, it’s extremely important to have a plan that will help you protect your newfound wealth.
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