8 Exit Business Planning Mistakes

.

Learning From Other’s Mistakes

Some people might think that the stories of Tom, Dick and Harry are simply instructional. In fact, they’re based on real-world woes of some customers of several CPAs I’ve spoken with.

So what can you do to avoid such horrid scenarios?

Learn from the 8 mistakes of others, including Tom, Dick and Harry:

1. Tom and Harry weren’t good at talking about their plans. No one enjoys talking about death or retiring from a job they worked at for years. It’s a conversation that deals with end-of-life issues. But those are realities. Both owners should have spent some quality time with their planning team (their CPA, lawyer and insurance professional) and gone over the details of their desired plans.
2. Every business needs an emergency plan to cover natural disasters, including the passing of a key person, as in the case of Tom. Try to do have written backup plan in place and then test it. Consider going on a one-week fishing trip and letting a lower-level employee or family member pick up the pieces. Take notes about what no one could handle and why they would need to call the owner for help. You’ll be amazed what you discover.
3. Beneficiary designations are a crucial part of any type of plan. So are all legal documents. In Tom’s case, he missed an opportunity to make money for his wife by not having a mutual aid agreement with another software company that could take over at a moment’s notice.
4. Hand pick and groom your successor. Start by determining whether your family members really want to be in charge. You would be shocked at how many times the next generation has no desire to take charge or is so unprepared that they should be replaced by a non-family member. When a successor is picked, allow him to make key decisions and a few mistakes in the process.
5. Harry’s pension was unfunded. This meant there was no money put safely aside to guarantee a retirement when the company failed. A funded plan is always better.
6. Create value in your business. Dick made two classic mistakes. First, he didn’t see the exposure created by dependency on a single, major customer. That dependency makes a company worth less because of obvious risk concentration. Second, he lied about his gross revenue. Not only does that set the business up for a tax fraud charge, but also creates a presumption that the business records lack credibility. You have no idea how much a good CPA enjoys taunting a seller with the famous lines, “Did you lie on your tax returns before? Or are you lying about your sales revenue on the business proposal now?” For the seller, it is truly a no-win situation.
7. Harry Sr. left a number of value-killers on his company books. Slow-moving inventory and receivables are a drain on cash and credit lines. He should have taken care of those problems up before he left the company.
8. Consider the tax ramifications of your exit. Most times, an insurance policy can be exempt the beneficiary from taxes if structured properly. And reporting sales properly doesn’t always create a bad income tax consequence if you properly track related costs, like the result of writing off bad debts and dumping bad inventory to create an offsetting deduction.

These are just a few of the lessons that every owner should learn from and discuss with their advisors when planning for the future of their businesses. Don’t learn this the hard way, as Tom, Dick and Harry did.

Related articles:

Renting Out Your Property? Prep For Tax Traps

Finally! A New Home Office Tax Deduction