If you’re like most business owners, your business is important to you, your employees, and your family. What will happen to it when you retire? If you die “tomorrow”? Perhaps you have successors in mind (family members, key people, or co-owners). Perhaps you will sell it to an outsider. Maybe you don’t have a management and ownership successor and it’s not the type of business that can be sold, so you’ll just liquidate it. Either way, any of those scenarios take thoughtful pre-planning to maximize your options.
Neglecting planning is to “plan by default, not by design.” Make and implement plans in order to avoid making these costly mistakes.
No business succession plan
- Step back from the day-to-day of working in your business and take time to work on your business – Make your transition plan.
- Determine your goals and objectives – How long you wish to work and in what capacity; who you wish to transfer your ownership to; who you wish to lead the business and if they’re qualified. Understand what skills will need to be replaced when you’re no longer in the business.
- Have a professional business appraiser provide a planning estimate of your company’s value so you know what you’re dealing with and to help determine planning options.
- Determine what you need from the business to meet your personal financial needs (helps determine feasibility of your goals, provides insight on transfer strategy (i.e., sale vs gift), etc.).
- Where there’s multiple owners, execute and fund a buy/sell agreement for planned (sale, retirement) and unplanned (death, disability, divorce) events, then periodically review it.
No plan to attract, retain, and develop key employees
- Attracting, retaining and rewarding key employees is crucial to the long-term success of the company
- Any owner needs a strong management team in place
- Let your key employees know you value them using nonfinancial and financial means
- Maximize traditional benefits where you can (i.e., health insurance, flex spending, retirement plans)
- Offer selective benefits for key employees/executives using nonqualified plans which allow you to discriminate who you reward/incent and how
No personal wealth accumulation plan
- Identify your personal goals (college funding, second home, gifting, retirement savings, etc.); Gain an understanding of how they impact each other and how each impacts other areas of your personal finances
- Plan now for how you will meet and balance your business and personal financial goals
- Diversify your personal net worth – Build personal wealth outside the business to reduce the risk of unforeseen events that could impact your business and to give you more options later on how to transition it; Start early
- Assess how all your personal assets and liabilities are structured to determine how/where to hold them, if changes need to be made and to aid in prioritizing every dollar
- Be smart about what you do with your investments – Understand what your investment strategy needs to be to help meet your goals; Develop an asset allocation to maximize returns while minimizing risk; coordinate your investment strategy with your tax situation for optimal after-tax returns
No retirement plan outside the business
- Don’t assume the business will be your retirement (risky)
- Begin planning early – Assess your retirement savings needs and ability to meet competing financial goals (don’t overestimate the value of your business; don’t underestimate the impact of inflation and healthcare costs)
- Start saving early to maximize the power of compounding so less catch-up later
- Maximize retirement plan contributions then evaluate other vehicles
- Evaluate if a Roth IRA conversion makes sense for your situation
No comprehensive estate plan
- Make sure your estate planning documents are in order and coordinated with your buy/sell agreement
- Review your estate plan to see if it will “play out” as you intend – Look at the whole picture including assets that pass outside your will
- Understand where estate taxes will be paid from for insight on where liquidity needs to be and so you don’t inadvertently disinherit an heir; If you have a life insurance trust, understand how the mechanics would work for the estate tax payment so assets don’t go to unintended heirs
- Review for sufficient liquidity to provide for family and to cover bequests, debts, estate taxes, and estate settlement costs to avoid a fire sale of the business
- Make sure the structure (owner, beneficiaries) of life insurance matches the type of buy/sell agreement you have so the insurance proceeds go to the right place; Make sure you have the proper amount of life insurance and disability buyout funding for your buy/sell agreement
You want to leave your business someday. “Someday” will be here before you know it, so it’s critical to have plans in place that coordinate your business and personal finances to meet the goals of each. The longer you wait to work through this process, the fewer choices you will have, the less likely you will be able to meet your goals, and the costlier the outcome from a financial and quality-of-life perspective for you, your family and your employees. Remember, it takes time and significant effort to build a successful business. Isn’t it worth devoting the time and effort necessary to plan a successful exit?
It also takes professional guidance from an experienced team and our firm’s wide array of services uniquely positions us to help you through this process. If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
