Are You Working on the Business ... or Just in the Business?
April 12, 2018 | Chawn Honkomp, Business Financial Advisor, CPA, MBA
Running a successful business takes time, strategy and hard work. You may find yourself designing or manufacturing products, working with vendors, helping customers or managing employees. As a business owner, you’ll eventually want to retire and enjoy the benefits of your hard work. As you approach that day, you want to have a solid exit plan in place so you’re set up to successfully leave the business on your terms, set the minds of your employees and clients at ease, and help your successor take over with confidence.
Many business owners simply don’t plan for their personal financial future or for the next generation’s ownership. Some have kids ready to take over, so they assume the transition will take care of itself. Others simply avoid thinking about the day when they’re no longer in control of the business they’ve diligently nurtured. Still others hesitate to jump into an arena they know little about.
You’ve put in long hours building your business, and your legacy, so that you can pass it on intact. Because no one knows what tomorrow will bring, now is the time to plan for that transition.
THREE KEY AREAS FOR PLANNING
Planning for the future generations of your business may seem complicated, with delicate decisions to make. Over the years you’ve held many roles in your business, and it’s now time to add succession planner to the list. Think about these three planning categories designed to help you and your family work together to realize long-term planning goals:
- Succession strategies
- Retirement income
- Estate planning
DEVELOP YOUR SUCCESSION STRATEGY
If you’re like most business owners, you’ve not given much thought to how, when and to whom you’ll transfer your business. Too often, your everyday business gets in the way of long-term planning. Someday, you’ll leave your business, whether by a planned or unplanned event. Some transitions can be anticipated, like a planned retirement. Other events are less predictable, such as an untimely death or disability. Being prepared for both with a formal succession plan increases the next generation’s chance of success.
It’s important to make plans to exit your business on your terms — no matter what the circumstances are. This planning can help protect you and your family under many contingencies: retirement, death, disability, personal bankruptcy or even a divorce. Key items to consider include: 1) to whom will you sell or transfer the business, 2) when do you want to transition, 3) how much will you sell for, and 4) where will the funding come from and what will the payment terms be.
We get it — retirement could mean slowing down, not walking away. You’ll still be involved, but with a different role. The next generation will be doing more, and earning more from the business. Planning ahead can help you buy back your time and do those things you’ve likely put off while you were tied to the day-to-day (like that vacation you’ve promised yourself).
Your business will likely play a key role in providing your income during retirement. Diversifying your income source based upon timing and income tax characterization can be beneficial. Key items to consider include: 1) how much will I net from the sale of my business, 2) what retirement income sources will I have, 3) will those sources be enough to meet my retirement income goals, and 4) what is the tax impact to my retirement income from each source.
LEGACY AND ESTATE PLANNING
Deciding where your assets go when you are gone is a tough, and important, decision to make. You’re the only one who can decide what’s fair. But doing it now allows you to gather input, explain decisions, equalize your estate and leave a plan that’s easy to execute without unnecessary tax burdens. Numerous effective techniques are available to successfully protect and transfer your assets. Key items to consider include: 1) who do I want to leave my assets to, 2) how do I protect my assets while I am alive, 3) do I want to be fair or equal to my heirs, and 4) do I have an estate tax liability, and if so, how will it be handled.
TEAM OF ADVISERS
No single adviser can counsel you on all the components of a solid exit plan — it is up to you to create and develop your team. The proper team of advisers will help you with your transition planning so you can successfully leave the business on your terms and perpetuate your business through the next generation. The importance of planning can’t be overstated — we’ve all seen or heard about what a lack of planning does to businesses, families and employees. Surround yourself with the right people who will help you spend time working on the business, not just in the business.