Choosing to make the transition from business owner to retiree is a significant milestone. Deciding to step away from the business and embrace retirement can be a difficult decision for many business owners. Before you can begin enjoying the benefits of retirement, you first need to create a successful exit strategy.
An exit strategy refers to how the business will be handled after you retire. There is a range of different exit strategies that you can use to decide how your business will operate following your retirement and can have an impact on your tax status.
Types of exit strategies
Every business is different so there is no one size fits all approach to choosing the best exit strategy. The exit strategy will depend upon your business type, the industry landscape and what you ultimately envision for how the business will progress after your retirement. The most common exit strategies include a succession plan, the sale or merger of a business, liquidation or the closure of a business. It is best to discuss which exit strategy suits your specific needs and business structure with an experienced business management accountant.
Succession plan
A succession plan details how the critical roles of a business will be filled following your exit. There are two main components of succession plans, the transfer of power (who will control the ownership and the assets of the business) and the transfer of management (who will manage the business).
In your succession planning process, you should carefully consider who you would like to appoint as your successor, and how you would like to distribute the control. Just like in the hit HBO television show, Succession, choosing a successor can take some serious deliberation and can potentially affect your relationship with not only family members, but those remaining in the business. It is important to evaluate possible successors based on their skills and experience, understanding of the business and how they envision the business moving forward.
You can choose to split the transfer of power and the transfer of management, deciding whether it is a full or partial succession. For example, you have the option of appointing family members to inherit the ownership of the business, while appointing the management of the business to an existing employee. Alternatively, you can retain ownership but reduce or relinquish your role in managing the business.
When creating your succession plan, you need to clearly outline who will be taking over the business, in what capacity and the timeframe of when the succession will be implemented.
Sale of business
If you have decided to retire, you can choose whether you would like to sell or merge your business to an interested party. Selling your business can give you the opportunity to retire with a significant sum of money to support you, which is especially important if you have neglected to contribute to your super while running your business. You may be subjected to Capital Gains Tax (CGT) on the sale of your business, although there are certain CGT concessions available to small businesses.
There are multiple different ways to sell your business. These can involve the decision to sell outright, the negotiation of an ‘earn out’ or an external management buy-in. To sell your business, a buyer will usually follow the process of accessing the business and drawing up an offer. A buyer will investigate (with help from an accountant) the total value of your business to propose a fair price. This evaluation will involve understanding the return on investment, value of assets, price earnings value and the overall market value. The proposed price of your business may also be affected by timing, such as how the economy is performing and other industry factors.
Merger of business
Similar to a sale, a merger involves the combination of your business with an existing business to create a single entity. This can create a stronger business which is more competitive and cost-efficient. The process of choosing to merge a business is similar to selling, you may choose to sell your business which will then be merged into one single company or choose to create a new company which combines two existing businesses.
Liquidation / insolvency
In some cases, a business owner may need to liquidate their business as an exit strategy. Liquidation usually occurs due to financial difficulties (such as being unable to repay debts or not meeting financial obligations) and often is not the decision of the business owner. Instead, liquidation tends to be actioned by creditors or auditors. As trading as an insolvent business is illegal and bankruptcy can impact your future credit and other rights, it is important to look for early warning signs of your business becoming insolvent. Liquidation tends to be a more dire exit strategy and is not recommended for those wishing to transition to retirement.
Closure of business
Some business owners choose to cease operation and permanently close their business. This can be good for those whose business solely depends on them and their existing skills, without which the business would be unable to operate. It can also be a suitable choice for business owners who are looking to make their transition to retirement quickly and are not interested in selling, merging or creating a succession plan. To close your business you will need to sell and/or dispose of any assets and stock, pay any remaining debts or bills, notify customers and employees about the closure and finalise both legal and tax obligations.
Implementing your exit strategy
After you have decided which exit strategy is right for your business and circumstances, it is time to begin working on how you will implement the strategy. You will need to create a document outlining your exit strategy, the timeline of your strategy and the tasks, obligations and deadlines which need to be completed before the strategy is completed. It is highly recommended that you create this document with advice from a business management consultant to ensure that it is compliant with all tax and legal requirements. It is also recommended to employ the services of an advisor to oversee the exit strategy to ensure a smooth transition to retirement.
You can discuss which exit strategy best suits your business and how you can transition from business owner to retiree with the experienced team at Stones Sharp. Our team can advise on your unique situation and help you create a successful strategy so your business is taken care of. Contact us today to learn more.
FCPA & CA
Shane is a Fellow of the Australian Society of Certified Practicing Accountants and a Chartered Accountant.
Shane’s passion is to consider the clients, the client’s business and taxation affairs with a holistic approach whilst providing business mentoring, business strategies, systems development, taxation advice and taxation planning in order to assist his clients and their business achieve their goals.
