Can One Exit Plan Save a Million Dollars, Twice?

The following case study is based on a true story. For owners of closely held businesses, this case study highlights the importance of engaging an experienced and professional exit planning team. Even when an exit plan looks like it will work at a high level for all parties involved, there are often hidden problems and issues that can cost the exiting owner millions of dollars. Therefore we recommend that all business owners seek help from professional exit planners, like our NAVIX Consultants.

Key Lessons

One of the four possible exit strategies is to sell the company to an inside buyer, such as a business partner or a key employee. At NAVIX, we call this an “Innie” Exit Strategy. A key risk for this type of transaction is excess taxation.

  • Transaction Taxes – Funds bonused to the employees for the buyout will be taxed as ordinary income, and then taxed again at capital gains rates when they are paid to the outgoing owner.
  • Estate Taxes – If the owner has significant other assets, the transaction proceeds may get taxed again at the estate tax rate, which is currently set at 40% for most taxpayers.
  • Control – If payments are going to be made over time, the exiting owner will need to retain some form of control over the company.
  • Professional Help – Most business owners do not have the expertise and experience to know all the potential risks and opportunities associated with exiting their business. They should seek help from a professional exit planning team
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