Why Estate Planning Is A Critical Part of Business Exit Planning

Keith Wetjen |

Thinking about retiring from or selling your business? If so, we encourage you to pause and first turn your attention to your estate plan.

Why? Because having a clear, up-to-date estate plan is the necessary foundation for a successful business exit plan.  

Your business exit plan needs to fit within the broader context of your personal objectives. How and when you exit the business will determine the monetized value of your business assets. As a result, having a clear understanding of your (and, if applicable, your family’s) personal financial needs before developing your roadmap for exiting the business is critical to ensuring you’ll have a future income stream to meet your goals.

Below are four key steps our Entrust Wealth Partners team can guide you through to help plan so that both your estate plan and business exit plan set you up for success: 

Step #1: Work with your advisor to evaluate how much money you need to meet lifetime goals

The first step in the planning process is to determine how much money you need to live comfortably for the rest of your life. This includes both the day-to-day expenses you’ll incur to maintain your lifestyle as well as larger investments such as education expenses for children or grandchildren. 

Another important consideration is that some expenses currently covered by your business may become your personal responsibility after you exit the business. For example, you may need to fund car payments or travel expenses out of your personal accounts moving forward. This can result in living expenses much higher than you expected and, ultimately, impact your exit roadmap. 

Step #2: Evaluate what surplus capital you have to leave to beneficiaries, including children, grandchildren, and philanthropic endeavors 

After determining the income needed to support your own living expenses, you’ll be better positioned to determine what remaining funds are available to gift to beneficiaries. This includes planned inheritances for children and grandchildren as well as any philanthropic donations or allocations you’d like to make in the future. It’s important to ensure you’ve accounted for these goals in advance of finalizing your exit strategy to ensure you have the appropriate income to support these wishes.

Note: A common challenge during this part of this process is managing the expectations of beneficiaries. Your advisor can support you in navigating these decisions and any necessary conversations with recipients as part of your estate and exit planning process.  

Step #3: Determine the timing for your business exit 

As you can see from steps #1 and #2, it’s important to first establish the basics of your estate plan - specifically your income needs and how you plan to allocate any surplus assets - in order to appropriately time your business exit. Once you’ve established your long-term financial needs, the next step is to ensure the timing of your exit aligns with a business valuation that will support your income goals.

Something often overlooked is how much time it takes to actually prepare your business for exit. The process of selling a business can take more than a year. And, if you’re looking to optimize the value of your business before the sale, you’ll want to allocate even more time (2+ years).  The earlier you work through steps #1 and #2, the more lead time you’ll have to prepare for a successful sale that supports your desired wealth goals.

Step #4: Consider tax implications and explore strategies to optimize your tax liability 

Once you’ve determined the appropriate timing for your business exit, the next and final step is to optimize your tax liability. Strategies such as gifting or transferring shares in the business can significantly reduce your tax liability. A donor-advised fund is another option. Giving accounts set-up at public charities, donor-advised funds allow you to receive an immediate tax deduction in exchange for a gift you make now or over time. You also have the opportunity to donate non-cash assets, which can be advantageous from a tax perspective, too. Your advisor can provide guidance on the tax optimization strategies available to you, how they impact your estate plan, and help determine which strategies may be most effective in pursuing your wealth management goals. 

At Entrust Wealth Partners, we’ve helped numerous business owners plan for and execute their business exit strategy. Time and again, key to success was ensuring plans were proactive and were integrated into the individuals broader wealth management plan. We’re available to do the same for you. Simply contact your advisor or reach out to us at (860) 838-3730 to learn more. 


This information is not intended to be a substitute for individualized tax/legal advice. Please consult your tax/legal advisor regarding your specific situation. Entrust Wealth Partners and LPL Financial do not provide tax/legal advice or services. This material was prepared by Courtney Henry Consulting.