Most entrepreneurs dream of selling their business one day. Yet most of them start planning their exit way too late, leaving millions on the table. All truly profitable exits are planned years in advance. Here’s why.
Tax structure: I generally don’t advocate for complex tax strategies for operating companies. First, because the time and resources used for tax strategies are more productive when used for growth instead (going 3x is better than saving 20 percent). Second, because such strategies increase risk and complexity and, therefore, reduce the value of your business. Oftentimes significantly.
However, the sale of the company itself should indeed be properly structured. You don’t want a tax bill to wipe out 20 to 50 percent of everything you’ve gained from your exit. And, thankfully, structuring an exit is generally easier and less risky than structuring an operating business. However, in most jurisdictions, such tax planning needs to happen years in advance.
Example I: Under German tax law, it is possible to transfer the shares of a corporation into a holding corporation without triggering a taxable event. This is generally the best exit strategy in Germany, because the holding pays very little tax on the sale and can reinvest the obtained cash under pretty favorable tax conditions. However, the holding must hold the shares for at least seven years (§ 22 UmwStG) after the transfer, otherwise it is taxed as a regular sale at market value.
Example II: Under German tax law, departing tax residents need to pay an exit tax when they cease to be tax residents. The assessment basis for this tax is the value of shares they own in domestic or foreign corporations. Company owners that want to leave Germany need to calculate if they should leave before an exit, after an exit, or if they should use a tax-neutral holding structure (like a private interest foundation in Liechtenstein or a cooperative) to carry out the exit.
Example III: Under federal tax law in the US, the qualified small business stock deduction (QSBS) enables individual taxpayers to exclude up to $10 million in taxable gains from their taxable income (§ 1202 IRC). However, there are several requirements that need to be given and proven at the time of the sale. One requirement is that the individual taxpayer has held the shares for five years prior to the sale. Another one is the proper acquisition of the shares, which the taxpayer needs to prove. Wrong or missing documentation can prevent taxpayers from proving their eligibility.
I won’t dive deeper into the tax aspects of an exit here, they deserve an own article. However, you get the point: an exit needs to be planned and prepared several years in advance from a tax perspective. Otherwise you might face a tax bill wiping out half of your net worth.
Legal structure: The legal structure of your company and the jurisdictions involved are among the first things a potential buyer examines. Which entities run the business, where are they registered, where are they managed, and are they all in good standing? Do they keep proper records and maintain a flawless compliance history? Why do these entities exist, what function do they serve, and is the structure coherent? Do you hold real estate or IP in separate entities to shield them from operational risk? Restructuring an entity group in a compliant way often requires statutory waiting periods, tax holding periods, regulatory approvals and extensive documentation. Cleaning up compliance issues can take just as long. In many jurisdictions, this alone is a multi-year process.
Example I: If you operate as a sole proprietor with no registered legal entity, you can only sell your business via an asset deal. Most professional buyers, however, prefer clean share deals for liability, continuity and legal-certainty reasons. If you want favorable terms at exit, you need to incorporate early and properly.
Example II: Running your business via offshore structures to save taxes is generally a stupid idea if you’re a tax resident of any high-tax country (or a U.S. person). Head over here to find out why. Now, if you genuinely live in a tax haven, operating a zero-tax or low-tax entity can be perfectly legal. However, keep in mind that not all tax havens are created equal. Dubai companies sell better than Seychelles companies. Hong Kong companies sell better than Dubai companies. And Malta companies sell a lot better than Hong Kong companies. If you’re a foreigner running an LLC in the U.S., taking advantage of its disregarded entity status, this isn’t a bad place to start, but only if your compliance history is absolutely flawless. No buyer, and definitely no U.S. buyer, will pay for your filing gaps.
Risk tolerance: Your business strategy needs to align with your goals. High-risk strategies can accelerate growth and create opportunities in day-to-day operations, but they will also close the doors to certain buyers. Some risks can be mitigated later, others harden over time and become deal-killers. Investors understand that taking risk is inevitable, but they expect you to choose which risks you take. Strategic risks are one thing; hard risks are another. Pending litigation, unresolved liabilities, or trouble with tax or regulatory authorities will either break the deal or force you into brutal discounts, escrows and guarantees. Nobody wants to buy a stranger’s problems.
Example: Launching a new product and accepting operational losses is a strategic risk. Launching a new product in a way that exposes you to a potential class-action lawsuit kills your exit prospects on the spot.
Capital structure: The capital structure of your company needs to be suitable for an exit. On the equity side, this means a clean cap table, a proper shareholder agreement and no hidden governance bombs. On the liability side, your debt structure (maturities, covenants, interest costs, guarantees etc.) must be acceptable to a buyer. Optimizing the capital structure can increase your companies valuation massively, but restructuring equity and debt takes time. Sometimes years.
Example: If you have minority shareholders, consider buying them out well before planning an exit. Especially if your shareholder agreement lacks drag-along rights. Most buyers expect to acquire 100 percent of the shares, and they won’t tolerate holdouts. This is especially true for private equity and strategic buyers, who need full control to reshape the company quickly.
Financial records: Without accurate financial records and clean numbers, there is no basis to value your company. Buyers will want to see several years of financial history, and institutional buyers will audit your statements line by line. You’re not fooling anyone. Cosmetic accounting, reckless tax tricks and sloppy bookkeeping will all resurface during due diligence, and the price you pay at that point will be brutal. Implement flawless bookkeeping and proper asset valuation practices at least five years before an exit. Ten years before the exit if you want serious buyers and serious multiples.
Operations: This field is too wide and too deep to cover here. One thing matters here: buyers pay for systems that deliver reliable results over and over again. Standardized operations create predictable financial outcomes. And predictability is one of the strongest value drivers in any deal. The longer your track record of hitting targets with the systems you’ve built, the more valuable your business becomes.
This list is not exhaustive. There are more factors you should optimize early if you want a clean and tasty exit. These are simply the big ones. The potential deal-breakers. Get them wrong and your exit will either collapse entirely or you’ll walk away with less than half of what your company is truly worth.
Let’s answer the initial question now: when should you start planning your exit? At least five years before you speak to a single potential buyer. Ten years, if you want to extract the maximum.
If you begin to prepare three years before the exit or even less, you’re guaranteed to leave a massive amount of money on the table.
If you need help preparing for a future exit and implementing the systems that maximize the value of your business, you know where to find me.
See you.