When you started your business, you had a vision, goals and dreams. As your business grew and changed, a strategy and plan evolved. Whether these plans were formal or highly informal, you had some sense of the direction you wanted your business to take. All too often, exiting your business doesn’t get that same attention. It can be easy to put off succession planning for a myriad of reasons; however it is important to create an adaptable plan and get everyone (family, partners, and key employees) on board. This will help to maintain the value of the business, maximize your retirement fund and protect your legacy.
But what are the most compelling reasons for taking the time to create a succession plan?
- Tax efficiency: Planning can provide you with the most after-tax dollars for your retirement. No one wants to pay more tax than necessary; therefore by investing some time in planning your exit from your business, you can shelter more of the retirement fund your business creates. Although there is an upfront investment in professional fees, this translates into long term gain.
- Tax deferral: Many of the available options for succession recommend methods where the business owner gets paid out over time. These options allow funds to remain invested in the business to earn income with the tax paid later. Pushing the payment of tax into future years can be very beneficial as you can generate income on the funds you would have otherwise paid in tax. Timing is everything and planning could result in income while in a lower tax bracket, reducing the net tax payable.
- Adequate Skills: You may know exactly who you want to carry on your business after you retire, but you also must consider if that person has the skills to successfully run the business. By planning early, you buy yourself time to pass down valuable information to the future owner and therefore maintain the value of the business. Sometimes you realize that your desired successor doesn’t have the necessary skill set and therefore you need time to seek an alternate.
- Ideal Successor: You may know you want your business to carry on after you retire, but not be sure who could make that happen. Planning allows you and your network of advisors time to identify the ideal successor and implement transitionary actions to maintain the value of the company upon your retirement and provides opportunity for your business to be your legacy.
- Adequate Funds/Resources: The ideal successor may be someone who does not have the funds on hand to purchase your business outright. Planning creates time to access the funds necessary to pay you for your business. This may simply mean time for the successor to secure reasonable financing or could mean a change in share structure to be paid out over time through the business’ earnings.
- Contingency Plan: You may plan to retire in 5 years only to run into health problems or receive an unsolicited offer to purchase your business. Having a flexible succession plan in place can act as a contingency plan for unforeseen events. This can greatly reduce the stress placed on you and your family should the unexpected happen.
- Peace of Mind: Taking the time to think about your wishes and financial needs upon retirement can help you to realize what you really want for your retirement and for your business. Open discussions with family, key employees and even your advisors (lawyers and accountants) can raise issues and possibilities you had not thought of yet and result in an even stronger emotional response. At the end of the day, succession planning will provide you with peace of mind that you made decisions that make you happy so you can enjoy your retirement or your next great adventure.
Although there are numerous reasons why you are putting off succession planning, there are more compelling reasons to put it back on the table. Investing some time up front can drastically increase the amount of money in your pocket when you retire while giving you and your family peace of mind that you made the right decisions.
Stay tuned next month to find out exactly when you should start preparing your succession plan and why!
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