This article continues our series describing the advantages and disadvantages of the five primary Exit Paths that business owners might choose. In our last article, we showed you some of the detriments of Employee Stock Ownership Plans (ESOPs). Today, we’ll examine the advantages of the final Exit Path: staying in the business until death (and yes, there are a few, especially for owners prone to follow status quo). As always, our goal is to introduce important issues so that business owners, Exit Planning Advisors, and Advisor Teams can communicate and strategize on the same terms.
Generally, there are two types of owners who intentionally stay in the business until they die. First are those owners who can’t leave because their businesses will fail without them or their financial security depends on continued business income (i.e., those businesses either have no transferable value or the owner’s financial security requires the business). In both cases, the business owner is forced to stay in the business.
However, there are owners who consciously choose to die working as their Exit Path. In fact, of all owners who responded to The BEI 2016 Business Owner Survey, 9% said that they would choose not to exit their businesses. This is the group we will discuss in this article, because even if owners intend to die at their desks, Exit Planning can still have value to them.
Dying at the Desk by Choice
Business owners who choose not to exit have usually given thought to their business exits, but they are not prepared to make plans to exit in their lifetimes. They may have successors in mind, but they not prepared to act. After all, if an owner wishes to own his or her company indefinitely, it is difficult to find successors willing to commit to acquiring that company whenever the owner finally dies. Additionally, there are owners who truly want to stay in their businesses forever. To find out why, we’ll look at six advantages to staying in the business forever for some owners.
Advantages of the 'Dying at the Desk' Exit Path
Advantage 1: Financial Security
There are four things that business owners who never want to exit usually consider advantageous:
- Because transferring ownership is a non-starter, owners keep all of the income and other benefits of ownership during their lifetime.
- Most successful owners continue to enjoy financial security as long as they own their businesses, because the success of their companies supports their security as long as the business continues its success.
- Continued ownership of a successful business, which is the only kind of business that can be exited successfully, generally results in continued cash flow for the owner that far outpaces the returns on a comparable value of investments.
- Owners may perceive the risk of losing income/assets to be greater if invested in stock and bond markets than the risk in continuing to own and receive income from their businesses, primarily because the business is an asset they control.
However, reaping these advantages requires the business to provide financial security in the first place. As we know, most owners overestimate the value of their businesses, which can negatively affect their financial security even if they choose to die at their desks. Changes in the marketplace, technological advances, and recessions can all affect business owners who intend to die at their desks. This is why even owners who never intend to exit can find value in Exit Planning.
Advantage 2: The Time Factor
Business owners often plan to stay indefinitely because they find meaning and joy in continued ownership. They want to spend time with their businesses more than just about anything else, so keeping the status quo is what drives them. Of course, this assumes that the business is insulated from unexpected downturns, which is a huge function of proper Exit Planning.
Advantage 3: The Time Margin
For business owners who consciously choose not to exit, their current activities continue without any need to change. If owners are enjoying ownership, they presumably have the time margin they want.
Advantage 4: Tax Consequences
There are two distinct tax advantages for business owners who decide to work until they die. First, the owner’s estate (or new owners) will enjoy a step-up in basis when ownership transfers according to the owner’s estate plan. Second, with today’s lifetime exclusion amount, estate taxes are no longer a concern for most owners. Most ownership transfers will not be taxable at the owner’s death. So, owners who choose not to exit get the best of both worlds: a step-up in basis for their successors and no taxes on transfer of ownership upon their deaths. Exit Planning Advisors can handle estate planning issues with help from their Advisor Teams.
Advantage 5: Values-Based Goals
Having a conscious no-exit Exit Plan can benefit business owners who want to keep their businesses in the family or in the community. If an owner’s goals include keeping the business in the family or community, the no-exit Exit Path achieves those goals by ultimately transferring ownership at death to their families.
Advantage 6: Successor
Again, if a business owner’s goal is to transfer a business (or its value) to family, standard estate planning can achieve that goal more easily than ever under the recently enacted Tax Cuts and Jobs Act (Public Law no. 115-97). If an owner transfers the business at death to others—a third party, management, or ESOP—a post-death transfer avoids capital gains taxes.
In our next article, we’ll look at the dangers of not having an Exit Plan.