Five Current Events That May Affect Business Owners’ Exit Plans

Insights from Karina Horton, CFP^®, CEPA^®

Exiting a business is a major milestone that requires advanced planning. Business owners must weigh their hopes and plans against whatever current economic climate they face at the time they aim to pass on their legacy. Those hoping to sell or pass on their businesses in the next few years should make sure to consider the following factors as they determine which route is best for them:

1. Estate exemption amounts

Long discussed and long expected, it is finally coming—the estate exemption amount will be reduced on January 1, 2026. Currently, individuals can gift up to $13.61 million with no tax consequence to either the giver or the recipient, and married couples filing jointly, can combine that amount to nearly $28 million. This limit has enabled many seamless transfers of business entities while the owners are still alive, whether to family or key management.

The new limit has not been finalized, but consensus estimates it will likely be about half, or $7 million per person. Once the changes go into effect, owners of a business worth more than the exemption amount will have to consider additional means to execute a transfer beyond a gift. That could be selling a portion versus giving it away or waiting until death and letting the business pass via their estate. Even at death however, if the remaining value of the estate exceeds the exemption amount, the estate will be obligated to pay taxes on that excess value which can be taxed at up to 49%.

2. Interest rates

The current economy has seen several interest rate hikes and rates are well above what we have seen for the previous decade. Federal funds rates are now near levels we haven’t seen since 2007 and may remain there for some time. This means that the cost of capital is more expensive, and debt is more difficult to obtain, thereby potentially impacting the succession plan of an owner hoping to sell their business.

The higher interest environment may eliminate buyers who don’t have access to capital. This may mean inside sales—selling to a minority owner or a younger employee—are more difficult because those buyers can be less likely to secure the necessary debt. Even those willing to sell to the outside may be pigeon-holed into dealing with only the largest buyers, like private equity companies. The owners may not be able to consider smaller, more strategic buyers because those buyers can’t access the capital needed to make a competitive offer. That may mean sacrificing some of the non-financial goals an exiting owner may have, such as keeping the company name or retaining long-standing employees.

Lastly, interest rates are taken into consideration for business valuations. A high interest rate environment may lower valuations as the cost of capital stays high or climbs higher still. As owners consider their priorities in their business succession plan, it is important to stay aware of the interest rate environment and how it might impact their options.

3. Labor

Exiting a business requires transitioning the roles and responsibilities previously held by the sellers to the new ownership. This is important not just for the legacy of a business, but also for its value when the owner is hoping to sell the business. If there are roles that will need to be backfilled after the purchase, this is a cost that buyers will consider.

Businesses everywhere continue to struggle with finding and retaining talent, and owners have been forced to adapt, stagnate, or die. Changing wage environment, remote work, flex-hours, and labor automation will continue to evolve and impact businesses and their owners. Businesses with robust and cross-trained management teams will command higher purchase prices than those where an owner is still working daily in the business, especially if they are filling multiple roles.

Owners looking to sell a business in the next few years would be wise to take a hard look at their organizational structure and make sure they have the right people in the right roles and have created an environment that will retain that talent through transitions.

4. Generative AI

If selling the business is part of your succession plan, know that buyers will also consider technological capabilities and how it compares to industry expectations. If your technology doesn’t match, the buyers will offer less knowing that they will need to invest after purchase to catch up. Embracing technology can not only increase efficiency but potentially replace human capital—which is in short supply, as mentioned previously.

The pace of technological development is getting faster. In recent polls of business leaders, Generative AI moved from a mid-top-ten component of business growth to the number one—and just in the last year.

Adopting new technology like AI can bring about transformative change, but it also requires major investments of not just capital, but time and leadership. As technology further evolves, owners will need to weigh the cost and time commitment of implementing the latest and greatest advancements against the impact of not keeping up. As you consider your exit timeline, ask yourself: Would you rather sell now for a lower value, or take the time and energy required to invest in advancements that may increase the company’s value and get you the best offer? If you are considering investing in technology, will you get back more than you invested?

5. Tax deduction limits

Owners of pass thru entities such as LLCs or S-corps will no doubt be aware of the anticipated changes to tax deductions. The current 199A pass thru tax deduction limit was set by the TJCA of 2017 and allows for up to a 20% deduction in qualified business income. This was another change that was always intended to be temporary but has been very advantageous to companies with pass thru entities.

For those who own pass thru entities, this may increase tax liability and thereby reduce profitability to owners. Buyers will anticipate this and may lower valuations, or it might make companies that once enjoyed the maximum deduction less attractive.

To make things more complicated, this is a change that many parties are lobbying hard to make permanent. The Fed is expected to announce by the end of this year whether they will become permanent or go back to pre-2017 levels. Because it is an election year, however, there is a chance that the decision will be delayed until mid- or late-2025. Should they decide later in the year to return to pre-2017 levels, the decision will take effect retroactively and still impact the entire 2025 tax year.

To be clear: Buyers know that these deductions may go away. There is no reason to hurry up and sell thinking the buyers won’t already be factoring this into their offers. It may, however, influence whether to sell or gift the business—particularly since these same businesses are often those that will be impacted by the estate tax changes coming in 2026.

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Business succession plans always require thoughtful planning, and this current economic climate has a few extra details for consideration. There is no black-and-white answer, but by being aware of the variables that can influence the outcomes of different approaches, you can choose the exit that best matches your plans and the legacy you hope to leave behind.