Business Owners and Their Succession Plans
Friday, September 7th, 2012
Many business owners find their wealth is mostly tied up in their businesses, which provides well for them and their families. When it comes to protecting their business, however, business owners often have not quantified how they would replace their income when the time comes for them to exit or sell their business and retire.
The fact is retirement is an emotional, financial and timing issue for business owners. If you own your own business, you should be aware of five developments or questions and address them with your financial advisor. Together, you will want to ensure you have in place a way to mitigate the risks associated with this single asset, your business.
First, the recent economic malaise has brought home the concerns about relying on your business alone to fund retirement. Just as your investments should be diversified, so should your assets. Though it may be difficult to do in a challenging business climate, business owners should save and accumulate retirement assets away from the business to make progress toward retirement.
Second, have you considered whether your business is an asset you can sell? Whether or not you can find a buyer for your business depends on a variety of factors, including whether there are employees or partners who could continue to run the business after you retire or whether your business is the type to attract outside buyers. For example, companies that produce tangible goods and have positive cash flows can often be sold. On the other hand, specialty firms that rely on you and your skills alone, such as boutique consulting firms, are generally not salable. The truth is most businesses fall somewhere in between.
Third, if you were to sell your company and pay the taxes on your gains, would the proceeds be enough to last for the rest of your life? How you would derive a similar level of income in retirement that you now enjoy from your business?
As a business owner you likely work very hard and your dedicated efforts are an important ingredient to your business success. The investment returns from your growing business may well exceed the investment returns from a prudent investment portfolio. In the long run, however, the income derived from your valuable work ethic simply may not be replaceable. Business owners are often optimists by nature, and they take risks to grow their business. The risk of putting all your eggs in one basket may not work as well, however, when it comes time to build an investment portfolio.
Fourth, what happens if you cannot be involved in running your business? Stories abound about professionals who are struck down by illness, death or disability, leaving business partners and spouses to figure out what comes next. If more than one partner or shareholder is involved in your business, it is important to have a buy-sell agreement in place. A buy-sell is a written agreement between two or more owners of a business. If a triggering event occurs, one or more owners will have the right or obligation to buy the business interest from the owner who is obligated to sell. Triggering events often include the death, divorce or disability of a partner or shareholder. The agreement may establish a funding mechanism to facilitate the purchase of an owner’s interest in such cases.
Finally, do you have a plan in place that will allow you to retire regardless of a sale? The current business environment is a reminder that you may not be able to sell your business at the precise time you wish to sell.
Planning for succession in a small business is a priority of the first order. It begins with the objectives you want to achieve. Talk through these concerns with your financial advisor to ensure you have the plan, the capital and the agreements in place to transition your business when the time is right or events require succession in your business.
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