Planning for a Future Sale
While this may not seem to solve the issue of exit planning for a business owner, holding onto the business ownership interest allows for proper planning for a sale. This planning includes the preparation of a business valuation, analysis of value drivers, and focus on value growth during the holding period. If this strategy is employed, a holding period of 3-5 years is preferable in order to fully implement any value growth strategies.
Economic Uncertainty
This strategy aims to maximize sales. However, business owners using this approach may face several potential pitfalls. These pitfalls mainly focus on the uncertainty of the economic conditions when the business goes to market.
Regulatory and Tax Issues
Regulatory issues may complicate holding onto a business. For instance, those businesses that utilize raw materials that will be impacted by the tariffs imposed by the Trump administration may face reduced margins and profitability. Additionally, tax issues with the upcoming 2025 sunset of the Tax Cuts and Jobs Act of 2017 (“TCJA”), and the potential tax changes related thereto must be considered. These changes could potentially result in the elimination of the qualified business income deduction and bonus depreciation.
Succession Planning
Finally, the business owner must assess their succession plan, specifically to ensure that they have sufficient life insurance in place, and that the ownership of the life insurance policy is structured properly to ensure that complications do not arise upon the death of the owner. A recent Supreme Court decision in Connelly v. United States resulted in a challenging valuation situation for businesses that own life insurance policies on the owners of the business.
