In our last edition, we highlighted the issue of how, and if, your business could continue without you. Now, we are going to address the solutions and give you some practical steps to get started.
In many cases, there are family members involved in the business—spouses, children, etc. Sometimes, they are being groomed to eventually take over the business. This is succession planning. In any case, this also requires proper planning. There are legal and financial issues that need to be addressed in the event the primary business owner doesn’t make it to the final processes. This also brings in HR issues—who are your key employees? Is there one or more who would be interested in taking over the business and would be a capable business owner?
There have been stories of grown children taking over a family business, and because they were not properly trained, the business suffered, and in many cases, shut down due to improper management. Whether it’s a family member or a trusted employee, they need to be trained along the way if this is part of your plan. Ensuring that there is something in writing (legal) that gives that person, or persons, legal and financial authority along the way is another way to protect the business. Cross training of employees so they can effectively cover for each other is also critical. If Sally, your Office Manager for 20 years, and basically runs the business administration, one day does not come in, how will that business run if no one knows what Sally does on a daily basis? There is also #key person life insurance to cover that loss.
What if you have more than one owner? This could be related people or non-related. In either case, you will need to have an operating agreement on an LLC, specifying the legal authority each has in the business. There should also be a properly executed Buy-Sell Agreement, specifying the terms of a buyout should one of the owners leave, either voluntarily or involuntarily. This would also be funded with life insurance in the event of the death of one of the owners, allowing the successor owner to essentially “buyout” the deceased owner’s heirs. There are stories of partners having to take on spouses or children of the deceased into the business ownership, which if not a planned succession, can wreak havoc on the business and the remaining business owner! With proper planning along the way, these pitfalls can be avoided and the business, if viable, can live on. At this point, you will need a business valuation to know how much your business is worth, to peg those numbers in the Buy-Sell Agreement and also for the amount of the life insurance on the partners.
For companies large enough, with 30 or more employees, you may be a good candidate for an Employee Stock Option Plan (ESOP). This is a structured buyout by your employees and is a “qualified” plan under the IRS, similar to a 401(k). If you are interested in this option, contact us for an assessment.
“You will exit your business one day-either voluntarily or involuntarily- either way, you need a plan!”
I recently had lunch with a friend who is an accountant for small businesses. She said that when she helps a new business owner set up their company, she asks them what their end outcome is for the business! She says they need to set it up with the exit strategy in place, right from the beginning. Well, not all business owners thought about that when they started, and some still have not. The ones who are thinking about it are usually moving toward retirement—after years of running a successful business, they are ready for “WHAT’S NEXT?!”
If you are a business owner looking to exit your business in the next 2-10 years, you definitely have some planning to do! Unless you have a succession plan, and qualified people to take over for you, you are probably looking to sell your business, right?! So many business owners will tell you, “My business IS my #retirement plan. Well, if that is the case, there is plenty of work to be done. I like to compare it to selling a house—you don’t wake up one morning, and say “I’m going to sell my house” and immediately call your favorite realtor to list it. There is a process involved. You may take weeks, even months, preparing the property for sale. Why? Because you want to get the highest possible price for it! The same is true for your business but there are many more factors to consider; with a house you are (usually) only selling the structure, not the contents. With a business, you are selling the whole enchilada—all your Processes, People and Profits. A potential buyer will have your company under a microscope, so you’d better be ready. A business valuation plan is essential here, to know what you are working with out of the gate. My previous blogs highlighted the Processes, People and Profits aspect. We work with small business owners to align them and their business properly to maximize their value at time of sale. If you are wondering what your business is worth, today, check out our special offer at the end of this blog…
One of the key areas I have seen with business owners, especially the men (sorry guys!), is in many cases, they have NO LIFE outside of the business. That look of utter fear crosses their faces at the prospect of not having to get up and go to the office, or the shop, or all the other daily activities they are engaged in running the business. This is a treacherous slope if you have not planned out what exactly you expect retirement to look like. Is it endless golf games on the course of the world? Spending valuable time with grown children and grandchildren? Buying that boat and spending summers by the water? Or that cabin in the mountains, surrounded by all that beauty and, my husband’s favorite-fishing!? How about traveling the U.S. in that RV? This is an essential part of exit planning and cannot be overlooked or minimized. And you need to start on this before your planned exit!
We also need to make sure the personal finances are in order. If you are not yet Medicare eligible, what will you do for health insurance? Are there known medical issues that may cause a soar in medical spending down the road? What about the unknown? Is your house paid for, or is that part of the plan with the sale of the business? Have you planned for long term care, should you or a spouse need in home care or residential care down the road? Having had a several clients who are now claiming on their long term care insurance, I will tell you, I never hear them complain about the premiums they paid for all those years…
How much do you need in liquid assets to cover your lifestyle and life expectancy? How are you going to invest the proceeds? Are you looking for other income producing opportunities, like real estate or even buying another business (it happens!)?
Couples need to have these conversations. One of the questionnaires I give new exit planning clients is on comfort zones financially and what they expect to do in retirement. The answers are very telling if they are on the same page or completely out of agreement. Maybe we need to bring in a counselor…?! Actually,there are life coaches who work in the “What’s Next” space. It may be advisable in some situations.
So what if the exit is not voluntary—and one of the other events occurs? None of us have any guarantees we will wake up the next day, or not be hit with a catastrophic accident or illness. Don’t be like the 2nd business owner mentioned above—protect your loved ones, your employees and your business. They are all your largest asset.
For more information on business planning, contact me at 520-888-9649 or reach out here.
If you want a business valuation, we are offering special pricing now through the end of April. We will need three years’ business financials, so now is the perfect time with 2019 updates. You can contact me directly, or go to our contact page.
We love working with business owners on their planning and would be happy to provide a complimentary assessment of your situation with recommendations to achieve and attain your goals.