Business Succession Planning: When to Start and How to Maximize Value

Many business owners dedicate a lifetime to building their companies, yet far too many delay succession planning until it’s too late. If you own a business, this is especially concerning, as more than half of US business owners are over 55, with nearly a quarter aged 65 or older. Despite this, studies show that most have no formal succession plan in place.

Without a clear strategy, you risk leaving money on the table, overpaying taxes, or even jeopardizing your company’s future beyond your tenure. 

Why Start Succession Planning Early?

Starting early is the key to a successful business exit. You may underestimate how much time is needed, but experts generally recommend beginning succession planning at least three to five years in advance or even earlier when possible. Some advisors suggest that five to seven years is the ideal timeframe to begin, allowing ample time for preparation.

Early planning gives you the luxury of time to build value, groom successors, address weaknesses, and ensure a smooth transition. It also allows you to strengthen financial metrics, diversify your customer base, and resolve legal, operational, or financial issues that could impact the sale price. Additionally, it improves buyer and successor selection while preserving continuity for your employees and customers.

Ultimately, early planning ensures business stability, maximizes value, and prevents rushed, undervalued exits.

Understanding Business Valuation Methods

One of the most important steps in an exit strategy is understanding your business’s value. Business valuation determines your company’s fair market value, making it a crucial step in exit planning.

Professionals use three primary approaches to assess a business’s worth: the income approach, market approach, and asset-based approach. Each method provides a unique perspective on your company’s value.

• Income Approach: This method focuses on your company’s ability to generate earnings or cash flow. It estimates the future cash flow your business is expected to produce and determines its present value.
• Market Approach: This approach compares your business to similar companies that have sold recently. Similar to real estate comparisons, it assesses recent sales of comparable businesses to establish a market benchmark. For example, if businesses like yours typically sell for five times their annual earnings, that provides a reference point for your valuation.
• Asset-Based Approach: This method evaluates the value of your company’s assets and liabilities. In its simplest form, it calculates the net book value (assets minus liabilities) or the fair market value of tangible assets such as equipment, inventory, and real estate. It helps determine what it would cost to recreate or replace the business from the ground up.

In practice, a professional valuation may combine multiple approaches to determine a fair value. As part of succession planning, it’s essential to obtain an objective, up-to-date valuation rather than relying on personal estimates. 

As one exit planning expert emphasizes, a succession plan should include an accurate and current business valuation, ideally conducted by a reputable third party rather than based on an owner’s unverified assessment.

Key Tax Considerations for Your Exit Strategy

Taxes play a major role in determining how much you actually retain from a business transition. Whether you plan to sell your company or pass it down to your family, understanding tax implications early can help you maximize value and avoid costly surprises. 

Here are a few key tax considerations:

• Capital Gains Tax on a Business Sale: If you sell your business or a major stake, the profits are generally subject to capital gains taxes. In the US, long-term capital gains tax rates for business sales typically range from 0% to 20%, depending on your income bracket and deal structure. 
• Estate Tax and Family Business Transfers: If you plan to pass your business to family members at retirement or upon death, estate and gift tax implications are crucial. The US federal estate tax has a top rate of 40% on amounts exceeding the exemption threshold. As of 2023, individuals can transfer approximately $12.92 million tax-free, or around $25.8 million for married couples, under the lifetime estate and gift tax exemption.
• Additional Tax Factors: Other tax considerations include state-specific estate or inheritance taxes and variations in income tax rates on sale gains. The tax treatment also depends on whether you sell company assets or stock equity, which can affect depreciation recapture and overall tax liability.

Family Transition vs. External Sale: Choosing Your Business Exit Path

A key decision in succession planning is determining who will take over your business when you step aside. Your exit strategy typically involves either passing the business to family or trusted insiders or selling to an external buyer.

Both options come with advantages and challenges, and the best choice depends on your business structure, family dynamics, and long-term goals.

Keeping It in the Family (Internal Succession)

Many entrepreneurs dream of passing the torch to a son, daughter, or another family member. A family transition can preserve your legacy and keep the business closely aligned with family values. It can also be rewarding to see the next generation carry on what you built.

Despite its advantages, family succession presents significant challenges. Not all children want to take over the business, and many choose different careers. A recent survey found that 52% of business owners prefer to let their children forge their own paths rather than inherit the company. Even when heirs are willing, they may lack the skills or experience needed to manage the company, especially if it’s a complex operation. This partly explains why only about 30% of family businesses survive into the second generation, with even fewer making it to the third. Sibling rivalries and family conflicts can further complicate decision-making.

For a successful family handover, communicate early and honestly. Identify the right leader and invest in their training. If you have multiple children, ensure fairness by using life insurance or other assets to balance ownership. Above all, document your succession plan thoroughly.

Selling to an Outside Buyer (External Exit)

Selling your business to a third party, whether an independent buyer, competitor, or private equity firm, is a common exit strategy, particularly when heirs are unavailable or an external sale offers greater value.

An external sale provides access to the widest pool of buyers, increasing the potential for a higher sale price. However, it is often a more complex process than an internal transition. To succeed in the open market, you must ensure your company is in top shape to attract buyers and withstand their due diligence. This preparation includes organizing detailed financial records, demonstrating stable or growing revenues, and enhancing the business’s appeal, similar to staging a home before selling.

Other Exit Options

Aside from a direct family transfer or external sale, there are alternative exit strategies that blend elements of both:

• Sale to Insiders or Management: You might sell the business to key employees or co-owners. Selling to a trusted insider ensures continuity and keeps the business in familiar hands. If you have a co-owner, a buy-sell agreement established years in advance can facilitate a smooth transition.
• Management Buyout (MBO) or ESOP: In a management buyout, your leadership team collectively purchases the company, often using outside financing. An Employee Stock Ownership Plan (ESOP) takes a different approach, creating a trust to buy shares on behalf of all employees. An ESOP keeps ownership within the company while offering potential tax benefits for the seller.
• Wind-Down or Liquidation: If a business is highly dependent on the owner or lacks profitability, liquidation may be the most practical option upon retirement. In this case, the owner simply sells off assets and closes the company. While generally a last resort, it may be necessary if no viable succession or sale is possible.

When evaluating your exit options, start by identifying your top priorities. Is your main goal to maximize financial value, or do you want to ensure the business remains in capable hands? 

Consider the family members or loyal employees you want to support throughout the transition and be mindful of the tax and legal implications of each option. Many business owners explore multiple paths at once, such as preparing a family successor while engaging with outside buyers, to find the best solution. 

A well-rounded succession plan should outline both a primary strategy and a contingency plan to ensure a smooth transition.

Fortis Financial Group’s Total Wealth Solution: Maximizing Value with Holistic Planning

Fortis Financial Group delivers a total wealth solution, integrating every aspect of your financial life into a holistic strategy. Instead of fragmented advice or an investment-only focus, Fortis aligns investments, tax planning, estate management, risk protection, and more into a seamless plan. 

When you work with Fortis, succession planning is not an isolated process. It is coordinated with your retirement income needs, estate wishes, business sale timing, and essential protections like insurance and asset management. No two business owners are alike, so Fortis crafts strategies tailored to your unique circumstances.

Fortis Financial Group offers expertise in business valuation, tax optimization, and estate planning. As a fiduciary advisory firm, Fortis acts in your best interest and collaborates with your other advisors to ensure cohesive planning. The firm’s 360-degree approach ensures financial optimization by maximizing sale price, minimizing taxes, and driving investment growth while addressing personal priorities like family dynamics, legacy, and peace of mind.

Case Study: A Successful Business Transition with Fortis (Dan and Alison’s Story)

The Challenge: Dan and Alison, business owners in Seattle, sought a comprehensive exit strategy as they prepared for retirement. 

The Solution: After interviewing several firms, Dan and Alison chose Fortis for its personalized approach. Fortis incorporated Dan’s new business venture into their financial plan and collaborated with their tax accountant to minimize taxes on the sale. The couple valued the firm’s monthly reports with visual charts, which helped them easily track their financial progress.

Beyond financial planning, Fortis provided ongoing support to ensure Dan and Alison felt fully guided through the transition. Advisors helped achieve every goal, including unconventional ones, while collaborating seamlessly with their existing professionals. This seamless collaboration ensured every aspect of the plan was covered, delivering a fully integrated solution instead of fragmented advice. Regular reports with visual aids reinforced the couple’s confidence in the process.

Plan Today to Secure Tomorrow

Exiting your business is a major milestone, but thoughtful succession planning ensures a smooth and stress-free transition. To protect your legacy and maximize value, start planning early, build a team of advisors, understand your business valuation, and consider tax implications. No matter if you’re passing your company to the next generation or selling externally, a well-planned exit strategy protects your legacy.

If you’re unsure where to begin, our advisors provide a personalized Total Wealth Solution. At Fortis Financial Group, we help optimize your business’s appeal, structure deals strategically, and invest proceeds for long-term security. With proactive partners who prioritize your interests, you can anticipate and resolve challenges before they arise. 

Contact us today to design a seamless exit strategy and secure your financial future.

____________________________________________________________________________

Fortis Financial Group is a fiduciary wealth management firm based in Bellevue, WA, specializing in comprehensive retirement planning and investment management. We focus on helping our clients reduce stress by knowing when they can securely retire, stop overpaying taxes, and reduce the anxiety of financially navigating life transitions.

End Notes

1. Darger, Michael. “How Well are Business Owners Preparing for Succession and Transition?” EIX (Entrepreneur & Innovation Exchange), Oct. 2022 eiexchange.comeiexchange.com. 
2. CFO Selections. “Succession Planning: How to Leave Your Business in 5 Years.” CFO Selections Blog, 2021 cfoselections.comcfoselections.comcfoselections.comcfoselections.comcfoselections.com. 
3. Mason, Judy. “Three Common Business Valuation Methods.” MichaelSilver, Aug. 6, 2024 michaelsilver.com. 
4. McHugh Insurance Group. “Business Succession Planning: How Far In Advance Should You Begin?” Blog post, Mar. 4, 2024 mchughinsurancegroup.com. 
5. U.S. Bank. “Tax Implications of Selling a Business.” usbank.com (Financial IQ), 2023 usbank.com. 
6. MetLife. “Tax Implications of Selling a Business.” metlife.com, 2023 metlife.com. 
7. Kennon, Joshua. “What Is the Current Estate Tax Limit, Rate, and Exemption?” The Balance, Dec. 3, 2022 thebalancemoney.com. 
8. Wells Fargo Business Transition Survey, 2023 – via Wells Fargo Newsroom newsroom.wf.com. 

Fortis Capital (Fortis Financial Group). “Comprehensive Wealth Management – Our Unique Approach.” fortis.capital fortis.capital.