News & Tech Tips

Why Exit Planning is Essential for Business Success

Exit planning, although often only associated with the end of a career, is actually both a starting and end point. It’s not just the final stage. Exit planning is about preparing and implementing systems throughout the business’s life that protect and grow value so that you can maintain a profitable business today and possess an attractive business to potential buyers. Let’s examine the facts about exiting a business and discuss how exit planning is a good business strategy to implement over the life of a business.

Owner Readiness

According to a recent State of Owner Readiness survey conducted by the Exit Planning Institute (EPI), 99% of business owners agreed that a transition strategy is important for realizing future personal and business goals. However, 94% had no “life-after” plan, 79% had no written exit plan in place, and 49% had done no planning at all! Equally disturbing is that 63% of owners planned to transition within the next ten years. The saddest news is that, according to EPI, over 70% of businesses on the market do not sell. This is even true of family-owned businesses; only 30% transition into the second generation and only 12% into the third.

What is Exit Planning?

Exit planning is a process of operating a business through thoughtful planning, effort, and strategy that is transferable due to its strong structural, human, customer, and social capital. This concept interweaves an owner’s personal, financial, and business goals into a cohesive plan that focuses on creating business value today.

What is Value?

When a business is offered for sale, the price of the business is composed of two different parts: the tangible and the intangible assets. Tangible assets are those things that show up on the business’s balance sheet. Only about 20%-30% of a business’s value comprises tangible assets. The intangible assets make up as much as 80% of the value of the business. These intangible assets include the four capitals (structural, human, customer, and social) that manifest as goodwill, management strength, reputation, operations, and company culture. Inattention to intangible assets prevents businesses from successfully transitioning, which is why attending to these important aspects of business is a must to improve the value of a business.


The Four Intangible Capitals

Focusing on Value

It should be noted that value and income are not synonymous. Focusing on income keeps some business owners entrenched in maintaining their current lifestyle with little thought of their next chapter in life. Fortunately, focusing on the intangibles that add value to a business are best practices that should generate more income now while improving future value.

Business value improves through a cycle called value maturity. The Exit Planning Institute has developed a Value Maturity Index™ to help owners and advisors move through a value enhancement process called Value Acceleration Methodology™. This methodology begins by identifying the current value of a business, protecting the value by de-risking actions, and building the value through improving the intangible capitals of the business. Once the business value is in a growth curve, the owner can manage the business and further increase value or choose to harvest the value of the business through a transition event.


As you can see, exit planning is a comprehensive endeavor that requires meticulous preparation and a targeted approach. It’s not a step taken at the last moment; it’s a strategy woven into the fabric of your business. In the dynamic business world, where change is constant and the future uncertain, a well-crafted exit plan shields against unexpected storms. The exit isn’t an end; it’s a new beginning. Learn More.

Navigating the Future: 5 Essential De-Risking Strategies for Businesses

The business landscape constantly evolves, and businesses must be prepared for anything. That’s why it’s essential to have a strong de-risking strategy in place. De-risking strategies help companies to mitigate their risks and protect their assets.

5 Essential De-Risking Strategies

Here are five essential de-risking strategies that businesses should consider:

  1. Succession planning: A well-crafted succession plan ensures the business can thrive without key figures. This involves identifying and grooming internal talent and developing relationships with external candidates.
  2. Buy-sell agreements: Buy-sell agreements protect businesses from the financial and operational disruptions that can occur when a partner leaves. These agreements outline the terms and conditions under which a partner’s interest can be bought or sold.
  3. The 5 D’s of Exit Planning: The Exit Planning Institute cites the 5 D’s as death, disability, disagreements, distress, and divorce. Any of these can devastate a business. Planning appropriately for how the company will be transitioned when facing one of these challenges helps bring peace of mind when tragedy strikes.
  4. Risk mitigation strategies: Risk mitigation strategies help businesses identify and reduce risks. This can involve implementing internal controls, purchasing insurance, and complying with regulations.
  5. Financial contingency planning: Financial contingency planning helps businesses to weather unexpected financial challenges. This involves setting aside reserves and planning to reduce costs or raise additional capital.
Other De-Risking Strategies

In addition to the five essential de-risking strategies listed above, businesses can consider several other strategies. These include:

  • Cybersecurity preparedness: Businesses must be prepared for cyberattacks and data breaches. This involves investing in cybersecurity measures, training employees, and planning to respond to incidents.
  • Intellectual property protection: Businesses relying on intellectual property (IP) must protect their assets. This can involve registering trademarks, copyrights, and patents.
  • Diversification of revenue streams: Businesses should diversify their revenue streams to reduce their reliance on any one source of income. This can involve expanding into new markets, launching new products or services, or developing new partnerships.
  • Supplier and vendor management: Businesses must carefully manage their suppliers and vendors. This involves assessing their financial stability, operational efficiency, and contingency plans.
  • Regulatory compliance: Businesses need to comply with all applicable regulations. This can help to protect them from fines, penalties, and other legal challenges.

De-risking strategies are essential for businesses of all sizes. By implementing these strategies, companies can protect themselves from risks and ensure long-term success. Certified Exit Planning Advisors (CEPAs) can help you de-risk your business. Whalen has two CEPAs on their team who are happy to discuss these strategies with you.


Navigating the percentage-of-completion method

Does your business work on projects that take longer than a year to complete? Recognizing revenue from long-term projects usually requires use of the “percentage-of-completion” method. Here’s an overview of when it’s required and how it works.

Completed contract vs. percentage-of-completion

Homebuilders, developers, creative agencies, engineering firms, and others who perform work on long-term contracts typically report financial performance using two methods:

  1. Completed contract. Under this method, revenue and expenses are recorded upon completion of the contract terms.
  2. Percentage-of-completion. This method ties revenue recognition to the incurrence of job costs.

If “sufficiently dependable” estimates can be made, companies must use the latter, more-complicated method, under U.S. Generally Accepted Accounting Principles (GAAP). And, if your business uses the percentage-of-completion method for financial reporting purposes, you’ll usually need to follow suit for tax purposes.

The federal tax code provides an exception to using the percentage-of-completion method for certain small contractors with average gross receipts of $25 million or less over the last three years. This amount is adjusted annually for inflation. For 2023, the inflation-adjusted figure is $29 million.

Percentage-of-completion estimates

In general, companies that use the percentage-of-completion method report income earlier than those that use the completed contract method. To estimate the percentage complete, companies typically compare the actual costs incurred to expected total costs. Alternatively, some may opt to estimate the percentage complete with an annual completion factor.

The IRS requires detailed documentation to support estimates used in the percentage-of-completion method. In addition, the application of the percentage-of-completion method may be complicated by job cost allocation policies, change orders, and changes in estimates.

Balance sheet effects

The percentage-of-completion method can also affect your balance sheet. If you underbill customers based on the percentage of costs incurred, you’ll report an asset for costs in excess of billings. Conversely, if you overbill based on the costs incurred, you’ll report a liability for billings in excess of costs.

For example, suppose you’re working on a $1 million, two-year project. You incur half of the expected costs in Year 1 ($400,000) and bill the customer $450,000. From a cash perspective, it seems like you’re $50,000 ahead because you’ve collected more than the costs you’ve incurred. But you’ve actually underbilled based on the percentage of costs incurred.

So, at the end of Year 1, you’d report $500,000 in revenue, $400,000 in costs, and an asset for costs in excess of billings of $50,000. If you had billed the customer $550,000, however, you’d report a $50,000 liability for billings in excess of costs.

Getting assistance

Although the percentage-of-completion method is complicated, if your estimates are reliable, it can provide more current insight into financial performance on long-term contracts. Contact us to help train your staff on how this method works — or we can perform the analysis for you.

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Plan now for year-end gifts with the gift tax annual exclusion

Now that Labor Day has passed, the holidays are just around the corner. Many people may want to make gifts of cash or stock to their loved ones. By properly using the annual exclusion, gifts to family members and loved ones can reduce the size of your taxable estate, within generous limits, without triggering any estate or gift tax. The exclusion amount for 2023 is $17,000.

The exclusion covers gifts you make to each recipient each year. Therefore, a taxpayer with three children can transfer $51,000 to the children this year free of federal gift taxes. If the only gifts made during a year are excluded in this fashion, there’s no need to file a federal gift tax return. If annual gifts exceed $17,000, the exclusion covers the first $17,000 per recipient, and only the excess is taxable. In addition, even taxable gifts may result in no gift tax liability thanks to the unified credit (discussed below).

Note: This discussion isn’t relevant to gifts made to a spouse because these gifts are free of gift tax under separate marital deduction rules.

Married taxpayers can split gifts

If you’re married, a gift made during a year can be treated as split between you and your spouse, even if the cash or gift property is actually given by only one of you. Thus, by gift-splitting, up to $34,000 a year can be transferred to each recipient by a married couple because of their two annual exclusions. For example, a married couple with three married children can transfer a total of $204,000 each year to their children and to the children’s spouses ($34,000 for each of six recipients).

If gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return (or returns) that the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Because more than $17,000 is being transferred by a spouse, a gift tax return (or returns) will have to be filed, even if the $34,000 exclusion covers total gifts. We can prepare a gift tax return (or returns) for you, if more than $17,000 is being given to a single individual in any year.

“Unified” credit for taxable gifts

Even gifts that aren’t covered by the exclusion, and are thus taxable, may not result in a tax liability. This is because a tax credit wipes out the federal gift tax liability on the first taxable gifts that you make in your lifetime, up to $12.92 million for 2023. However, to the extent you use this credit against a gift tax liability, it reduces (or eliminates) the credit available for use against the federal estate tax at your death.

Be aware that gifts made directly to a financial institution to pay for tuition or to a health care provider to pay for medical expenses on behalf of someone else don’t count towards the exclusion. For example, you can pay $20,000 to your grandson’s college for his tuition this year, plus still give him up to $17,000 as a gift.

Annual gifts help reduce the taxable value of your estate. The estate and gift tax exemption amount is scheduled to be cut drastically in 2026 to the 2017 level when the related Tax Cuts and Jobs Act provisions expire (unless Congress acts to extend them). Making large tax-free gifts may be one way to recognize and address this potential threat. They could help insulate you against any later reduction in the unified federal estate and gift tax exemption. Contact us for more info.

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Selling your principal residence for a big profit? Here are the tax rules

Many homeowners across the country have seen their home values increase in recent years. According to the National Association of Realtors, the median price of existing homes sold in July of 2023 rose 1.9% over July of 2022 after a couple of years of much higher increases. The median home price was $467,500 in the Northeast, $304,600 in the Midwest, $366,200 in the South and $610,500 in the West.

Be aware of the tax implications if you’re selling your home or you sold one in 2023. You may owe capital gains tax and net investment income tax (NIIT).

You can exclude a large chunk

If you’re selling your principal residence, and meet certain requirements, you can exclude from tax up to $250,000 ($500,000 for joint filers) of gain.

To qualify for the exclusion, you must meet these tests:

  1. You must have owned the property for at least two years during the five-year period ending on the sale date.
  2. You must have used the property as a principal residence for at least two years during the five-year period. (Periods of ownership and use don’t need to overlap.)

In addition, you can’t use the exclusion more than once every two years.

The gain above the exclusion amount

What if you have more than $250,000/$500,000 of profit? Any gain that doesn’t qualify for the exclusion generally will be taxed at your long-term capital gains rate, provided you owned the home for at least a year. If you didn’t, the gain will be considered short-term and subject to your ordinary-income rate, which could be more than double your long-term rate.

If you’re selling a second home (such as a vacation home), it isn’t eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 like-kind exchange. In addition, you may be able to deduct a loss, which you can’t do on a principal residence.

The NIIT may be due for some taxpayers

How does the 3.8% NIIT apply to home sales? If you sell your main home, and you qualify to exclude up to $250,000/$500,000 of gain, the excluded gain isn’t subject to the NIIT.

However, gain that exceeds the exclusion limit is subject to the tax if your adjusted gross income is over a certain amount. Gain from the sale of a vacation home or other second residence, which doesn’t qualify for the exclusion, is also subject to the NIIT.

The NIIT applies only if your modified adjusted gross income (MAGI) exceeds: $250,000 for married taxpayers filing jointly and surviving spouses; $125,000 for married taxpayers filing separately; and $200,000 for unmarried taxpayers and heads of household.

Two other tax considerations

  • Keep track of your basis. To support an accurate tax basis, be sure to maintain complete records, including information about your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed for business use.
  • You can’t deduct a loss. If you sell your principal residence at a loss, it generally isn’t deductible. But if a portion of your home is rented out or used exclusively for business, the loss attributable to that part may be deductible.

As you can see, depending on your home sale profit and your income, some or all of the gain may be tax-free. But for higher-income people with pricey homes, there may be a tax bill. We can help you plan ahead to minimize taxes and answer any questions you have about home sales.

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