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- What is Exit Planning? - November 22, 2021
We want to share some of the insights from that interview here on the blog. First, read about how Holly recommends entrepreneurs can plan for the exit from the very beginning.
Thinking About the Sale of Your Business When Launching Your Startup
Jim Beach: How, at month one, can we think about the exit? What are some of the concerns both from a tax strategy and planning wise that we should be thinking about? What, at day zero, should we be including in our thoughts for 10 years into the future?
Well, it actually should occur before month one even begins. And what I mean by that is if you are able to properly plan for the structure of your business – how the business is formed, whether it’s an LLC, a partnership, or a corporation, and the various ways that tax elections can be made – if you’re able to do that before you actually start your business, the selling of your business becomes much easier.
It’s one of those old sayings, “Start with the end in mind.” If you do intend to sell your business at some point, that should be an important factor regarding how you choose to form your business entity.
So as an example, if you started a catering business and you have a family that loves to cook, you’ve been doing this for years and years as a hobby, and it’s something that you bring your family together around the table and do, you may not have any intention of selling your business. You may intend instead to pass it onto your children and your grandchildren. That may be a different decision that’s made or needs to be made as opposed to someone who’s building an IT company like you did, Jim. If you build an IT company, chances are pretty good you’re not likely going to pass it onto your children and grandchildren, so you may want to consider some of the other alternatives, whether it’s an LLC, or a C corp, or an S corp.
Again, those decisions depend on who you intend to sell the business to. So those are things that really should be given some consideration. ‘
Frankly, what I find happens is most business owners, they just say “I’m going to start a business entity.” They think, “Well my friend, he’s got an LLC, so that’s what I’m going to do, too.” And they do a little bit of Googling, and they figure out what an LLC is, and they may even find that they can form that on their own on a website online. They don’t even have to call an attorney. So they had no advice about what forming an LLC means, and they have absolutely no clue what the tax consequences will be or the fact that they can actually make certain tax elections if they form an LLC.
They don’t have any idea what that means when they go to sell their business, not to mention all the steps along the way – compliance with the tax laws, compensation, how that’s handled – it all differs according to the business entity.
So to answer your question, the decisions that will impact the sale of their business really should occur before they even start their business.
Listen to the full interview on exit planning and more here.