Steps Small Business Owners Can Take For Retirement


Baby boomer small business owners are getting closer to retirement and many of them are preparing to liquidate and take the next step and enter into their golden years. According to Axial, a leading network that combines business owners with sources of capital, 66% of all businesses with employees, nearly 4 million companies, are owned by baby boomers.  Unfortunately, too many of these small business owners don’t know how to start planning for “life after business.”

A paper published last month by Kristin Nelson, Head of Private Business Owner Solutions at Bank of the West, charts a course for business owners navigating toward their ideal succession plan (Smooth Transitions: Three Steps for Wholesaler Succession). Nelson discussed with what steps you need to take for a smooth transition when selling your business.

Boomer:  If family members are interested in running the business, what steps do I need to take to determine whether passing the baton to the next generation is a viable option?

Nelson:  When you're planning for the next iteration of the business and family dynamics are involved, decisions can be more complicated. Separating from a business that's a core part of your family history or that you worked tirelessly to build can be an emotional experience.

Take these simple steps to ensure you make a decision that will align with what’s right for you, your business and your family:

1. Start with an open family conversation. Bringing in an impartial outside perspective can help. A wealth management firm that offers family governance assistance can guide your family through this dialogue to get to the best solution.

2. As you consider the possibility of a family transition, it’s best to also get a sense of your outside options. Work with a trusted financial professional with expertise in succession planning to outline your financial goals and evaluate the possibilities, including selling the business to an outside third-party or selling the business to non-family members within the organization. Part of this process may include a business valuation to get a clear sense of your company’s worth.

3. Develop a learning plan to teach successors how to run the business. Pass on knowledge and relationships to the next generation before they take the helm.

Boomer:  How do I best determine the trust and estate implications of my succession plan?

Nelson:  When you own a business, your succession plan is one part of a complex estate plan and must be coordinated to avoid unexpected tax consequences. While trust and estate planning consists in part about how assets will be arranged at life and distributed at death, when wealth is concentrated in the family business, the organization, operation and eventual transfer of that wealth must be addressed in the estate plan.

The best thing you can do is start planning far in advance (it takes a minimum of 18 months to find a buyer, sell and exit the business) and work with a trusted financial advisor to guide you through the process and help you pose the right questions. The best advisors have access to a team of experts (tax, legal, family dynamics) who can collaborate on a broad range of succession issues.

Boomer:  What is a buy-sell agreement and how would this agreement maximize the value of the transfer?

Nelson:  A contingency plan can help protect your family and business legacy in case of an unforeseen event. Buy-sell agreements are critical documents that provide a plan in case of a triggering event, such as death, disability, retirement, divorce, or departure. Many are funded through life insurance policies, but the business purchase may also be funded in cash, by taking on debt, by liquidation, or through investors.

There are three basic types, and each has implications for succession and estate planning:

1. The cross-purchase: Here, two partners own insurance policies on each other so that if one dies the other can be bought out.

2. The entity purchase agreement: If one of the parties dies, the family is required to sell the shares to the business, and the business is obligated to buy. These are usually funded through a life insurance policy.

3. A hybrid: This may work when there is one insurance policy on each owner, held in trust. Premiums are paid by bonuses awarded to owners.

A buy-sell agreement can give you piece of mind. The agreement guarantees a buyer, ensures a fair selling price to match business valuation, and, if funded, provides the necessary liquidity needed for purchase. Since the terms are negotiated when all parties possess equal bargaining power, a buy-sell agreement often maximizes the price.

Boomer:  What insurance policies should I have in place to cover unforeseen events during the succession process and beyond?

Nelson:  No one likes to think about the unexpected. But, in the case of a tragic loss or accident, insurance can provide the liquidity needed to help your business (and its owners) weather the storm.

Depending on your succession plan, your business may want to consider purchasing key man insurance—a life insurance policy the company purchases on a critical person in the business, typically an owner, founder, or top employee. Life insurance policies like this are often taken out alongside a buy-sell agreement to finance the transition. The payout can also be used to help pay taxes or help tide the company over while searching for a new leader or buyer.