Information Centre · Commercial & Succession
Why Every Business Owner Needs an Exit Strategy
Why business owners may benefit from a plan for leaving the business, and the options available.
Key points
- An exit strategy considers how and when an owner will leave their business.
- Common options include sale to a third party, internal succession, family transfer or wind-up.
- Legal structure heavily influences which exit options are practical and tax-efficient.
- Exit planning is closely linked to succession planning, buy/sell agreements and the owner's Will.
- Starting early gives more flexibility, better valuations and fewer last-minute surprises.
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Many business owners spend years building their businesses. A plan for how they will eventually leave the business is also worth considering.
Whether the goal is retirement, succession to family members, a management buy-out, sale to a third party or preparing for unexpected events, an exit strategy is worth considering.
Earlier planning can help preserve options.
What Is a Business Exit Strategy?
A business exit strategy is a structured plan for transferring ownership, management or value from a business owner to another person or organisation.
An exit strategy may address legal, financial, taxation and operational issues so that the business can continue operating effectively during a transition.
A prepared exit strategy may also provide flexibility if circumstances change unexpectedly due to illness, disability, retirement or changing personal priorities.
Why Is Exit Planning Important?
If succession planning is deferred until retirement, options may narrow.
Without a plan, issues that may arise include:
- Reduced business value.
- Difficulties finding buyers.
- Unresolved shareholder issues.
- Weak succession arrangements.
- Tax inefficiencies.
- Operational disruption.
- Family conflict.
Earlier planning allows these issues to be addressed before they become obstacles.
Common Exit Options
The appropriate strategy will depend on the business, its ownership structure and the owner's objectives.
Options may include:
Sale to a Third Party
The business is sold to an external purchaser.
This may require preparation of contracts, intellectual property, employment arrangements, leases, licences and financial records to address purchaser due-diligence requirements.
Family Succession
The business passes to children or other family members.
Family succession requires planning to balance family expectations, management capability and estate-planning considerations.
Management Buy-Out
Existing managers acquire ownership of the business over time.
This may provide continuity while allowing the owner to transition out of the business.
Closure or Wind-Up
In some circumstances, the appropriate option may be an orderly closure of the business and realisation of its assets.
How Legal Structures Affect Exit Planning
The legal structure of a business influences exit options.
- Sole trader. The owner holds business assets personally; an exit typically involves sale of assets and goodwill.
- Partnership. Outcomes depend on the partnership agreement and the applicable Partnership Act.
- Company. The company continues to own its assets unless it sells them. An exit involving a company can be structured either as a sale by the owner of shares or as a sale by the company of business assets, with different consequences. Any constitution, shareholders' agreement or buy-sell arrangement governs share transfers.
- Trusts. Trust assets belong to the trust, not the owner personally. Control succession depends on the deed and its offices and powers.
- Cross-cutting issues. Intellectual property ownership; business premises; employment agreements; and key supplier and customer contracts.
Addressing these matters early may support transaction readiness and reduce complications.
Business Succession and Estate Planning
The relationship between business-succession planning and estate planning is worth considering.
Questions that may be considered include:
- What happens if the owner dies unexpectedly?
- Who will manage the business?
- How will ownership transfer?
- Is there a succession plan?
- Are buy-sell arrangements appropriate?
- Does the Will adequately deal with the owner's business interests, and is it coordinated with any constitution, shareholders' agreement, trust deed or buy-sell arrangement?
A Will controls only the owner's estate interests; company assets belong to the company and trust assets belong to the trust. A Will, a shareholders' agreement and a trust deed have different legal operation and need to be coordinated. An executor has no role while the owner is alive; an enduring attorney's authority is limited by scope and law and does not automatically confer directorship, trustee office, appointor power or control of company or trust assets. Coordinating these considerations at the outset can reduce future uncertainty.
Preparing for the Future
Considered exits benefit from planning.
Whether the objective is retirement, succession, sale or protecting the value that has been created, planning ahead can preserve options.
If you own a business and would like advice regarding succession planning, business structures, shareholder arrangements, buy-sell agreements or exit strategies, contact Parke Lawyers for assistance.
Frequently Asked Questions
When should I start planning my business exit?
Exit planning takes time because it can involve preparing the business (contracts, IP, employment arrangements, records), the ownership structure (shareholder or unit-holder agreements, buy-sell agreements, trust arrangements) and the personal position (Will, estate plan, superannuation, insurance). Earlier planning generally preserves more options; the appropriate lead time depends on the business, the owner's objectives and personal circumstances.
What are the main types of exit strategy?
Common options include sale to a third party, family succession, a management or employee buy-out, merger with another business, and orderly closure and wind-up. The appropriate option depends on the business, its ownership structure, the owner's personal objectives, family and management circumstances, and the tax and legal position. Many exit plans combine elements.
How does my legal structure affect my exit options?
The structure influences what may be transferred, to whom, and on what terms. A sole trader owns business assets personally, and typically sells assets and goodwill. A partnership's outcomes on exit depend on the partnership agreement and the Partnership Act. A company continues to own its assets unless it sells them; an exit involving a company can be structured either as a sale by the owner of shares or as a sale by the company of business assets, with different consequences. Any constitution, shareholders' agreement or buy-sell arrangement governs share transfers. Trust assets belong to the trust and do not pass under the Will; control succession depends on the deed and its offices and powers. Restructuring may be more effective if considered well before exit.
What is a buy-sell agreement and do I need one?
A buy-sell agreement is a negotiated and optional agreement between co-owners of a business (shareholders, unit-holders or partners) that may set out what happens to a departing owner's interest on defined trigger events (for example death, disability, retirement or exit), including valuation, payment mechanism, pre-emptive rights and the procedure for transfer. Insurance can be used as a funding mechanism, though it may itself raise ownership, tax, timing, premium and adequacy issues. Whether a buy-sell agreement is appropriate depends on the business, the owners and the transaction.
How is a business valued for exit purposes?
There is no single formula. Approaches commonly considered include capitalisation of earnings, discounted cash flow, an asset-based valuation, or a multiple of maintainable earnings referenced to comparable transactions. The appropriate method depends on the industry, the quality of financial records, the nature of the assets, dependence on the owner and market conditions. Formal valuation is normally undertaken by an accountant or business valuer; the legal documents should be consistent with the chosen valuation approach.
What are the tax implications of exiting a business?
Business exits can involve capital gains tax (including the CGT small-business concessions where the conditional eligibility criteria are met), GST, income tax on trading stock and depreciable assets, applicable state or territory duties (for example land transfer or landholder duty) on some transactions, and superannuation contributions where sale proceeds are contributed (subject to eligibility, caps and timing). The tax outcome varies with the structure, the parties, the assets sold and the sale terms. Specific advice from a qualified accountant or tax adviser should be obtained well before the transaction is documented.
What happens to my business if I die or become incapacitated without a plan?
The outcome depends on the structure. A sole trader's business assets may form part of the estate and be dealt with by the executor. A partnership's outcome depends on the partnership deed and the Partnership Act. A company continues to own its assets and to exist despite a shareholder's death; only the deceased's shares (and any personal rights) may pass under the Will, subject to joint ownership, trusts, the constitution, any shareholders' agreement and any buy-sell arrangement. Trust arrangements depend on the deed and its offices and powers. Incapacity raises different issues: an enduring attorney's authority is limited by scope and law and does not automatically confer directorship, trustee office, appointor power or control of company or trust assets, and an executor has no role while the owner is alive. Governance documents and succession mechanisms need to be coordinated.
How does succession planning differ from exit planning?
Exit planning focuses on the transaction — how ownership and value transfer to another person or entity. Succession planning is broader and includes management transition, leadership development, family governance and continuity of operations. Family businesses in particular may benefit from separating the two conversations.
What documents form the core of an exit plan?
There is no fixed list. A common set may include: an up-to-date Will and enduring power of attorney; a shareholders', unit-holders' or partnership agreement; a buy-sell agreement (which may be funded by insurance); the company constitution or trust deed; key employment, supplier and customer contracts; and a written statement of the owner's objectives to guide advisers. A Will, shareholders' agreement and trust deed have different legal operation and need to be coordinated — a Will controls only the owner's estate interests and must sit alongside any transfer restrictions, options, deeds and governance mechanisms.
Related business succession guides
A planned exit and an unplanned departure use many of the same legal tools. Our cornerstone guide on business succession planning in Victoria covers the broader framework, and what happens to a business when the owner dies sets out considerations where there is no plan. For multi-owner businesses, buy-sell agreements may govern a triggered transfer, and insurance may be used as a funding mechanism. Where the business sits inside a company, company director and shareholder death and private company shares in deceased estates explain how share transfers and director appointments interact with a sale. For trust-held enterprises, see family trust appointor succession.
Commercial & Succession
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This article is general information only and does not constitute legal advice. Please obtain advice tailored to your circumstances.