Business Succession: Questions You Need to Ask
It's not unusual for business owners to find that the majority of their wealth is mostly tied up in their businesses, which can be a major provider for them and their families. But when the time comes for them to sell their businesses because of a life-changing event such as retirement, many business owners often have not quantified how they would replace that important chunk of income.
Business succession can be an emotional, financial, and timing issue for business owners. If you own your own business and are considering a business succession plan, there are five questions you should address with your financial adviser. Together you will want to ensure you have a plan in place to mitigate the risks associated with one of your most important assets.
What other assets have you set aside to help fund your retirement? The recent economic recession 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 your retirement goals.
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.
If you were to sell your business and pay the taxes on your gains, would the proceeds be enough to last for the rest of your life? It's important that you determine if you will need to 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.
What happens if you cannot be involved in running your business? Stories abound about business owners 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.
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 should be a top priority. Begin with the objectives you want to achieve, and talk through these concerns with your Financial Advisor. Together you can help to ensure that you have the plan, the capital, and the agreements in place to transition your business when the time is right or when life events require succession in your business.
Wells Fargo Advisors does not render legal or tax advice.
This article was written by Wells Fargo Advisors and provided courtesy of Jonathan Buoni, Financial Advisor, in Springfield, MA at 413-755-1171. Investments in securities and insurance products are: Not FDIC-insured/not bank-guaranteed/may lose value. Wells Fargo Advisors LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company. ©2013 Wells Fargo Advisors LLC. All rights reserved.
