One of the biggest challenges entrepreneurs must confront is how and when they will exit the businesses they spent most of their lives building. After all, business owners view their companies as extensions of their personal identities. They neither have the desire nor the time to think about what will happen if and when they retire decades from now. Yet, advance planning is the only way that you, as an owner, can continue to grow your business today and control what happens to that company, your families’ financial security and your legacy long after you are gone.
Developing a succession strategy can be a time-intensive and emotionally charged process. It involves many moving parts that require constant attention, nurturing and education over many years to achieve the intended results. Therefore, the sooner you begin planning, the better the odds of a positive outcome. Having a succession plan in place early on will go a long way toward alleviating headaches and ensuring your business can survive and continue to provide financial support to family members and employees should anything unexpected happen to you, including disability and death.
Rather than thinking of a succession plan as a roadmap to a final destination, view it as an ongoing process of making decisions and putting the appropriate measures into place to minimize your exposure to financial and business risks. Essentially, the steps you take today will better prepare you and your business for a successful sale or transition of ownership in the future.
One of the first steps in crafting a succession plan is to understand how much the business is worth or for how much it can be valued in the future. Have the company and its assets been appraised by a professional? How much are similar businesses in similar industries and locations selling for currently? Are you meticulous in maintaining the business’s financial records? Are there issues that would raise concerns from a potential buyer?
Next, consider what you ultimately want from your succession plan. Do you want to keep the business in your family? Is there an obvious successor, such as a relative or employee, who is interested in and able to lead the company through a rapidly changing competitive environment? What training would a successor need, and how would you measure their ability to take over? Do you want to sell the business and walk away, or do you want to continue working in some capacity? How can you grow the business to maximize value? Will you continue to need the income from the company to fund your retirement years?
It is essential to consider these questions and determine the answers under the guidance of financial and legal advisors, who can provide the professional counsel needed to ensure that your exit strategy reflects and fits within your existing estate plan. Not only will you want to maximize the company’s value, but you should also consider the terms of your exit and whether the value you receive is sufficient to meet your lifestyle needs and family objectives. Ultimately, you will want your business and exit plan to be appropriately structured to preserve wealth and minimize tax liabilities. Moreover, your financial and legal counselors keenly understand your unique needs and wishes and your family’s dynamics. They can also provide a unique perspective and help to mediate family discussions so that your succession plan is considered fair and meets the personal and financial needs of all your heirs. Disagreements among surviving family members with different levels of involvement in a business are among the top reasons why many succession plans fail, and those businesses do not survive past the second generation.
Several estate planning issues and strategies should be considered to help effectuate a smooth sale or transition of ownership to a family member or an unrelated third party. For example, a buy-sell agreement that details the rights and responsibilities of all the business’s owners and lays out a plan for how they may sell their shares, to whom and at what price is a critical component of any succession plan. Consideration should be given to using life insurance policies, creating trusts and gifting shares of ownership interest directly to family members, keeping an eye on lifetime gift and estate tax exemption, capital gains and valuation discounts for transfers of non-controlling interests.
The more structure you can put around your succession plan, the easier the transition and the more likely you will be prepared to fund your post-business-ownership lifestyle. Engage professional counsel early on and focus more on the planning than the actual exit to improve your financial security and that of your family members for many generations to follow.
About the Author: Eric Zeitlin is managing director of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Eric Zeitlin is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
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Posted on February 28, 2024