There are steps a business owner can take to help increase the chances for a successful exit, but there are a few massive mistakes that can be made that could cost your investment in your company.  

For many business owners, this can account to as much as 70% of their wealth. These mistakes could cost millions of dollars.

The intention of this article is to set owners up for success by sharing my knowledge and experiences for what works and what you need to avoid at all costs.

Here are four lessons that can help roofing contractors successfully exit their business.

Procrastination Pitfalls

We had an owner who completed their exit plan over three years ago and had a mapped-out strategy for a management buyout.

Two major aspects of the plan were the succession (next owners) and an estate exposure of about $5 million. Both were delayed by the owner’s preoccupation and distractions with the execution of the plan.

His wealth qualified him for a unique insurance policy where he could receive a $5 million whole life policy to cover his estate tax liability with no outlay of premium dollars, but it would require collateral. We identified the exposure, presented the solution and had him qualified for the policy.  

Everything was in place — he simply had to complete the application and submit it. The procrastination lasted more than nine months, even after frequent nudges and reminders.

Last month we received a phone call from his attorney, who informed us that our client suddenly passed away in a tragic accident. Now his estate was obligated to pay the $5 million in estate taxes within nine months to the state and federal government, requiring him to sell/liquidate real estate holdings and savings. 

This was further complicated by the succession and continuation of the company.

Lesson: A plan is useless without commitment to execution.

Planning is Key

“At any given time, 40% of U.S. businesses are facing the transfer of ownership issue,” according to the U.S. Small Business Administration. “The primary cause for failure … is the lack of planning.”

We ask owners when they intend to begin their exit plan, and the answer is usually, “In five years.” Most owners are just too busy running their business to take time to plan for their exit. 

They often have completed a will, some estate planning and a buy-sell agreement, but not a clear, coordinated exit plan. Besides, it is an intimidating process coordinating and understanding all the different information and contradictions coming from the various advisers. 

Procrastinating owners often wait too long, only to be forced to liquidate their business for pennies on the dollar, leaving an irresponsible legacy for their spouse, family and community. This is why 70% of owners never exit and end up in liquidation.  

Lesson: Without a plan, you have no direction or exit strategy. 

Buy/Sell Agreement Risks

The most common problems we encounter in our planning process are within the structure of the owner’s buy/sell agreement. If left unaltered, these uncovered provisions and structures can lead to a devastating consequence for the business owner, the company and the family. 

Our analysis often exposes millions of dollars in potential unnecessary tax liabilities or structures that don’t support the owner's intentions. This exposure is unrecognized by existing advisers and must be confronted immediately, before we even begin to draft the exit plan.

Common risks include:

• An underfunded or unfunded buyout of an owner’s business interest. This typically should be supported by life insurance or, at the very least, clear, concise terms for a buyout over time.
• Improper valuation formulas and definitions that can create ambiguities and confusion when the need to implement them arises. Understanding the standard of value is critical.
• Insurance policies that are improperly coordinated, creating potentially significant tax consequences. Who will be the beneficiary? The company or the remaining owners? Why?
• Buy-sell agreements that have not been updated in years. The buy/sell agreement is a living, breathing document and should be reviewed periodically to determine if it still supports the changing business and owner environment. It should also be coordinated with the owner’s personal estate documents.

Lesson: Your buy/sell agreement should be updated and/or reviewed. 

Exit Tax Planning Considerations

Each exit path has a different tax implication that can range from 0% to more than 60%. Many factors come into play, such as entity structure, tax history and characteristics, and the deal structure itself.

An external sale, if not properly structured, could yield a tax bill of 60% or greater. The external sale might generate the highest sales price, but it could leave an owner with the fewest dollars after taxes.

An internal sale may have a smaller tax consequence for the owner. However, these deals are often improperly structured in a way that creates more of a tax burden for the seller and the buyer. There are legal strategies — if implemented early enough — that can reduce the taxes to the company, buyer and seller.

Lesson: Exiting can be very taxing!

There’s a lot at risk for your retirement, legacy and financial future without a strategic financial plan for your company and estate. Our advice is to begin a strategy about 15 years in advance of your planned retirement date to align all the moving parts, including succession, taxes, legal, financial, estate and asset protection. Time is your best friend in an exit and succession plan.