Business Exit Strategy Planning From All Angles

A significant part of AAFCPAs’ Transaction Advisory Services practice involves convincing business owner clients to plan for an exit well before they are actually ready to leave the business.

When asked when they should start planning, we often say “the day you start your business.” Realistically, a meaningful strategy can be put in place 3-5 years out from a planned exit. This allows for adequate time to ensure success in all aspects of the transaction, including liquidity, tax structuring, asset protection, valuation, due diligence, and profitable growth.

The work is incredibly interesting because each owner and business is unique—each with their own individual set of facts, circumstances, and goals for succession.

Are you ready?

We kick-off discussions by assessing readiness. There are two key questions we ask business owners to help determine if they are ready to exit:

  1. Are you financially prepared for an exit? i.e. Are the proceeds from the business going to support your long-term retirement and legacy goals?
  2. Are you mentally prepared for an exit? i.e. Are you ready to walk away from the business, give up control, and find new ways to fill your days?

The answers to these questions will help drive the development of a customized exit strategy.

What Do You Need to Exit?

We encourage clients to consult with AAF Wealth Management, or their existing wealth advisor, to develop a detailed personal financial plan as a first step to developing an exit strategy. As part of this exercise, you can project your financial needs in retirement, including an estimate of the “short fall,” if any, of liquid assets needed to achieve retirement goals.

For many of our business owner clients, the business is their most significant asset. And in most cases, owners find they have a “short fall” when they complete their personal financial plan. This “short fall” equates to the minimum after tax value they will need to receive from the business. The “short fall” does not equal the value of the business.

What is the Current Value of the Business?

Next, we leverage our business valuation team so you may gain an understanding of the current value of your business. If there is more than one owner, we encourage you to document a buy/sell agreement, which establishes a method for determining the value of a business, as well as stipulates how a partner’s share of a business may be transferred in the event of unexpected events such as disability or death. We find the “value now” concept eliminates conflict down the road.

It is important to note, this valuation only provides a “ballpark” estimate of the value of the business. Privately-held businesses do not have a single value. The value you receive for the business depends on who purchases it from you (or how you decide to gift it). When selling to an outsider, the goal is a high value. If gifting to a family member, a charity, or employees, a lower value may be the goal.

What Are Your Succession Goals?

There are many options for you to consider beyond an outright sale when planning an exit, and the best option is based on your goals for succession.

An exit plan should be documented and address your goals related to timing, ownership, and control.

We typically see four broad types of exiting owners:

  1. Leave right away for the most money
  2. Want/Need to grow the business
  3. Wealthy, but want to continue to work
  4. Wealthy, and ready to leave

What is Your Best Exit Option?

The five major types of transactions to consider as the basis for their exit strategy include:

  1. Gifting Programs
  2. Management Buyouts (MBOs)
  3. Employee Stock Ownership Plans (ESOPs)
  4. Private equity group recapitalizations
  5. Sale of the business

Often, these transaction types may be combined.


Many clients opt to gift some or all ownership of the business to family members, employees, or charity. A gifting strategy is often used when the owner has accumulated sufficient wealth and does not need cash from the business. These owners are also motivated to provide for their children and/or key employees.

In these cases, we bring in our Tax Consulting Attorneys who specializes in estate plans to evaluate tax implications and wealth preservation strategies. Timing for this transaction type may be crucial as proposed legislation, if passed, will have a major impact on gifting and estate planning.

Gifting is often combined with other strategies such as ESOPs and MBOs.

Management Buyouts

In some cases, the owner may prefer to give the management team (which may include family members) an opportunity to buy the business rather than selling to outsiders. This is often the case when an owner has acquired sufficient wealth, and they have an affinity toward these loyal team members who helped grow the business and the owner’s wealth.

In most cases, these managers or key employees know the business and value may be maintained through continuity of business operations. MBOs allow the owner to maintain a level of involvement and control, as the transfer can occur over the course of many years providing a flexible deal structure.

This strategy isn’t without challenge. The owner’s relationship with managers will change from employer/employee to partners. They will have to negotiate with people who work for them. Conflicts often arise when management realizes the owner still wants to maintain some control. Additionally, employees may not have liquidity or wealth to pay the owner up front, thus they may receive deferred payments over time. In these cases, owners typically require management to pledge the business assets as collateral.

Employee Stock Ownership Plans

ESOPs may be an excellent vehicle for owners who have prudently saved for their personal financial security, and are thinking about exiting the business, but are not yet mentally ready to retire. ESOPs, or employee share ownership, is where a company’s employees own shares in that company. Such plans may be selective or all-employee plans. Selective plans are typically only made available to senior executives.

ESOPs are often used in combination with gifting and/or MBOs. ESOPs have been in existence for over 40 years, and currently over 11,000 ESOPs exist nationwide. Mass Bay Brewing Company (Harpoon) established their ESOP in 2014. “Each of us here at Mass. Bay is invested in the success of our company.

Establishing an ESOP is not a simple process. An ESOP is a qualified retirement plan that is permitted to buy a company’s stock. Set-up requires an investment in advisory fees, a valuation (likely lower than the valuation that may be achieved with the sale of the business), and an ongoing obligation for the business to one day repurchase the ESOP shares, effectively cashing out the employees who retire or leave the company.

There are several benefits to an ESOP:

  • Creates a market for the purchase of shares
  • Offers flexibility to sell any number of shares to the ESOP at a timing of the owner’s choice
  • Offers the ability to sell the entire company at a later date
  • Has the potential to reduce taxable income of the business through annual, elective ESOP contributions
  • Other tax advantages based on the owner’s facts and circumstances

The cash to purchase shares may come from several sources:

  • The company makes cash contributions (tax deductible) to the ESOP Trust. The Trust then buys the shares.
  • The owner sells shares to the Trust and takes back a note. Cash contributions to the Trust are then used to pay down the note.
  • The Trust borrows money to fund the purchase of shares. Contributions are then used to pay down the note.

Private Equity Group Recapitalizations

In cases where the owner is not mentally or financially prepared to leave the business, we advise them to focus on reducing company risks (as a buyer would perceive it) and on increasing profitability. This combination will increase the ultimate value. As appropriate, we consult on increasing the value of the business given the time horizon to retirement. This often includes engaging our in-house Consulting CFOs.

In cases where owner’s need liquidity today, we advise them to consider a private equity (PE) recapitalization. PE groups aggregate the investments of individuals and institutions and invest those monies into private businesses that may provide better returns than other investment choices.

PE groups typically do not invest in companies that have historical profits of less than one million or a valuation of under ten million. Thus, this strategy is best suited for owners who meet these criteria, and who have an interest in staying on as an employee for an additional three to five years. At that point, they may be better positioned to sell the remaining ownership.

Sale to an Outsider

For owners who are mentally and financially ready to leave the business, an outright sale to an interested buyer may be the best option. Once the owner is equipped with the knowledge of the current value of the business and their needs for retirement, they know the minimum they are willing to accept. The goal, then, is to find a buyer interested & willing to pay that price.

There are essentially two methods to sell a business: negotiated transactions and auctions.

In Negotiated Transactions, the owner generally knows people in the industry, and identifies and contacts a limited number of potential buyers. In negotiated transactions, owners may be able to execute the sale without the support of an intermediary, transaction advisor, although we discourage clients from going it alone. A transaction advisor can expand the market of interested buyers, maximize the value in the transaction, take the pain out of the process, and minimize the distraction of the transaction from the demands of the day to day business. They perform analysis and understand your positioning, market your business to a targeted pool or a broader database, screen interested buyers, negotiate the terms, and assist in due diligence and closing. Transactional advisors are typically paid a “success fee” based on a percentage of the selling price.

The auction method of marketing allows the business owner to contact a broader spectrum of potential buyers, create a competitive bidding atmosphere, and in most cases, speed up the sale of the business. In these situations, I always recommend that the owner hire a transaction advisor.


When planning your business exit, it is important to start with a solid understanding of your circumstances and goals, which are personal, unique, and in progress. We listen carefully to you to understand what is important before considering the right path.

A successful business exit requires a customized and thoughtful plan, and a multi-disciplinary team. AAFCPAs is fortunate to have the resources of a 270+ team of knowledge workers, which includes CPAs, Certified Business Exit Consultants (CBEC), Consulting Tax Attorneys, Trust & Estate Tax Strategists, Consulting CFOs, CERTIFIED FINANCIAL PLANNER™ professionals (CFPs®), professionals Accredited in Business Valuations (ABVs), and independent insurance agents. This allows us to execute from all angles.

This article originally appeared in the July 2021 issue of SumNews, a bi-monthly magazine published by the Massachusetts Society of CPAs. 

About the Author

Jack Finning
Jack has been serving AAF clients since 1981. Jack provides assurance, tax and business consulting services to a variety of closely-held businesses, as well as sophisticated, nonprofit organizations. He advises clients in the specialty areas of revenue recognition, executive compensation plans, and government contract compliance. Jack specializes in business transaction advisory services for both buyers and sellers of private companies. This includes due diligence, tax structuring and post-transaction integration. Jack oversees many of AAF’s employee benefit plan audits.