Succession planning is a critical element of the business exit planning and retirement income planning equation. Many people who own businesses rely on their paychecks to maintain their preferred lifestyles. And if they want to retire – whether that’s in five, 10, or 15 years – they need to think about their succession plan, and consider what’s going to happen to their business. They’ll need to develop a succession plan, and decide if they’re going to sell their business to a family member, a business insider, or a third party.
Generally speaking, the only way they’ll be able to maintain their lifestyle is if they have a liquidity event and generate long-term assets from their business. Think about it: if you’re a business owner and you’re making $200,000 per year from your business, when you retire, you’ll have to find that income somewhere. Most business owners put all their money back into their business and have few other assets or liquidity, and that’s not ideal as you approach retirement. You need income to retire!
Have a Liquidity Plan
One of the most important things is to have a liquidity plan before you retire. Before you can even contemplate exiting your business, you’ll need to build up your personal balance sheet with assets other than your company. This might include cash, investments, retirement plans, or real estate. This is really important so that you won’t have to try and squeeze every last dollar from the sale of your business.
Most people put most of their money back into their business, but before you think about selling, you’ll likely need to change the pattern of cash flow. Take some of that cash flow and start putting it into your personal balance sheet, whether you buy real estate, invest it, or do something else. It’s important to build assets outside of the business.
Suppose you own a company, and you want to sell it to your son, so he can take it over when you retire. Now, imagine that you have little or no assets outside of your business. In this scenario, you’d need to sell your business for as much as possible to fund your retirement. But, truthfully, you’d probably want to give your son a “family discount” and give him the best price possible, letting him start out on the right foot as a business owner, so he can be profitable from the very beginning. If you sell it to him for top dollar, you’re immediately putting him in a tough financial position right out of the gate. But if you had spent some time building up your assets on your personal asset sheet beforethe sale, you wouldn’t need to sell it for as much. That way, you could forgo the higher sale price and give your son a financial break, selling it to him for the lower price. The same thought holds true if you decide to sell to key employees (your “business family”).
Organize Your Documentation & Keep Key People in Place
Before exiting your business, make sure that all your business and legal documents are up to date. For instance, review all your corporate and HR filings to be sure your “books” are in good order. A third-party buyer will require that. Also, be certain there’s adequate life insurance on you, as well as the key people in critical positions at your company. Continuing the earlier analogy, if you sell your business to your son and he dies, who is going to pay off the money that he owes you for the business? You must ensure that you’re properly protected and that means getting all of your planning in place.
Another element of a successful succession is to keep critical people in place to maximize the value of the business for the new owner. Create compensation plans and bonus structures to help ensure that key people see the benefit to staying – and won’t leave your company for a competitors’. Develop financial incentives, such as deferred compensation plans and incentive bonus plans, to motivate key employees to stay. A word about stock plans: It’s not always a great idea to give stock options to these employees because that can open up other issues, such as having minority business owners, the necessity to value the stock, the possibility of having to buy the stock back, and things of that nature.
It’s critical to work with a financial professional who understands the big picture and howsuccession planning ties in with business exit planning and retirement income planning. For instance, succession planning is an essential component of retirement income planning, and helps identify potential sources of income that could be derived from exiting your business. Potential income streams could include things like payments from selling stock in the business, renting real estate back to the new business owner, and deferred compensation or consulting fees for being involved in the business after the sale.
Ensure Guaranteed Income Streams
When we discuss retirement income planning, we often talk about guaranteed income streams. These could include the sale of your business with payments made over a certain number of years, rent from a building you own, plus any ongoing salary payments from the business. These payments will ensure that a certain level of your monthly expenses are covered in retirement.
Suppose when you’re 55 years old, you started increasing your pension plan, and putting more money on your personal balance sheet. At 60, you sell your business, and get a consultant’s fee for five years, your pension plan, plus the rent for the real estate that you own kicks in, while waiting for your Social Security benefits to start. It all fits together at a 10,000’ level.
At Guyton-Forge, we offer the expertise of a big firm with a small town feel. We customize our approach (and our advice) to meet each client’s specific situation, needs, and goals. We’re proud to do things differently – it’s part of what sets us apart as a friendly, high touch practice. We offer extensive experience and knowledge, creating strong, long-term relationships with our clients. The Guyton Forge team is here to help you achieve – and exceed! – your financial goals. Please contact us with questions and for any financial needs.
