Generally, there are two types of owners who intentionally make no plans to exit.
First are those owners who can’t leave because their businesses will fail without them or their financial security depends on continued business income (i.e., those businesses either have no transferable value or the owner’s financial security requires the business). In both cases, the business owner is forced to stay in the business.
However, there are owners who consciously choose the no-exit Exit Path. In fact, of all owners who responded to The BEI 2016 Business Owner Survey, 9% said that they would choose not to exit their businesses. This is the group we will discuss in this article.
No Exit Plan by Choice
Owners who choose not to exit have usually given thought to their business exits, but they are not prepared to make plans to exit. They may have successors in mind, but they not prepared to act. After all, if an owner wishes to own his or her company indefinitely, it is difficult to find successors willing to commit to acquiring that company whenever the owner finally decides to exit. Additionally, there are owners who truly want to stay in their businesses forever. To find out why, we’ll look at six advantages to not planning an exit for some owners.
Advantages of the No-Exit Exit Path
Advantage 1: Financial Security
There are four things that business owners who never want to exit usually consider advantages to their decision:
- Because transferring ownership is a non-starter, owners keep all of the income and other benefits of ownership during their lifetime.
- Most successful owners continue to enjoy financial security as long as they own their businesses, because the success of their companies supports their security as long as the business continues its success.
- Continued ownership of a successful business, which is the only kind of business that can be exited successfully, generally results in continued cash flow for the owner that far outpaces the returns on a comparable value of investments.
- Owners may perceive the risk of losing income/assets to be greater if invested in stock and bond markets than the risk in continuing to own and receive income from their businesses, primarily because the business is an asset they control.
Advantage 2: The Time Factor
Owners often plan to stay indefinitely because they find meaning and joy in continued ownership. They want to spend time with their businesses more than just about anything else, so keeping the status quo is what drives them.
Advantage 3: The Time Margin
For owners who consciously choose not to exit, their current activities continue without any need to change. If owners are enjoying ownership, they presumably have the time margin they want.
Advantage 4: Tax Consequences
There are two distinct tax advantages for owners who decide to work until they die. First, the owner’s estate (or new owners) will enjoy a step-up in basis when ownership transfers according to the owner’s estate plan. Second, with today’s lifetime exclusion amount, estate taxes are no longer a concern for most owners. Most ownership transfers will not be taxable at the owner’s death. So, owners who choose not to exit get the best of both worlds: a step-up in basis for their successors and no taxes on transfer of ownership upon their deaths.
Related: The Advantages of a Sale to an ESOP
Advantage 5: Values-Based Goals
Having a conscious no-exit Exit Plan can benefit owners who want to keep their businesses in the family or in the community. If an owner’s goals include keeping the business in the family or community, the no-exit Exit Path achieves those goals by ultimately transferring ownership at death to their families.
Advantage 6: Successor
Again, if an owner’s goal is to transfer a business (or its value) to family, standard estate planning can achieve that goal more easily than ever under the recently enacted Tax Cuts and Jobs Act (Public Law no. 115-97). If an owner transfers the business at death to others—a third party, management, or ESOP—a post-death transfer avoids capital gains taxes.
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