There will come a point where every business owner will want to retire from their business. Other times, the owner may not be able to leave voluntarily, but instead be forced to do so due to incapacity or death. Inthese instances, the loss of such and individual can wreak havoc on a business. Therefore having an appropriate “exit strategy” could be vital to a business owner’s financial and estate planning. This type of planning is referred to as a “business succession planning,” or “business continuation planning.”
The goal of this type of planning is to ensure a seamless succession as the business owner withdraws, whether voluntarily or involuntarily. IT involves various areas of law, such as tax, employment, and corporate law. It may additional require the help of other professionals, such as valuation experts and compensation specialist, to further help establish a solid plan for transfer of power.
There are six important steps to business continuation planning:
1. Establish Long Term Financial Goals
The first in creating a viable business exit plan and strategy is to determine the owner’s long term income needs and retirement goals. From this, the owner will be able to detmering how much money the sale of the business must generate in order for te owner to retire comfortable.
2. Determine the Current Value of the Business
Once the owner’s long term financial goals have been determined, the nest step to creating a viable business exit plan is to figure out the current fair market value of the business. This is done by analyzing the books of the business and comparing its profits with similar businessed in the area. The current value will then determine whether or not Step Three – Creating Additional Business Value – is necessary and, in turn, the approximate time-frame for the owner’s exit from the business.
3. Creating Additional Business Value
If the value of the business is what the owner expected, then the owner’s will most likely fall in line with the financial goals established in Step One. If, however, the value of the business is not as high as the owner expected, the owner will need to stay active in the business for a longer period of time in order to bring the value up the level that will allow the owner to exit the business comfortably. This will be the time for the owner to look at ways to increase the value of the business through expense and debt reduction, tax planning, and creative accounting.
4. Sale of Business
Once the owner’s time frame’s time frame form leaving the business has been determining, the owner should examine the pros and cons if selling the business to an outside third party or insiders, such as family members or key employees. The type of purchaser will dictate future employee compensation incentive packages, and tax planning strategies for minimizing capital gains.
5. Establishing a Contingency Plan
Even with a comprehensive business exit plan in place, things can go wrong. The owner could become physically or mentally disabled, a key employee could leave or die, or a fire or hurricane could completely destroy the business. The business owner should be prepared for such possibilities, and always have a prepared contingency plan, or a Plan B. Planning for these and other types of unexpected situations should be built right into every business exit plan. Things the owner should consider as part of a contingency plan include buy-sell agreements, key employee incentive programs, and purchasing business, disability, and life insurance.
6. Planning for Death
Once the owner has both a comprehensive business exit plan and a contingency strategy in place, the owner will be able to focus on their overall estate planning goals. Much of the estate plan may be tied directly to the sale of the business if it is to be sold to one or more family members, and this, in turn, will have a significant impact on the owner’s estate plan. On the other hand, once the business is actually sold, the owner’s financial position and holdings will change drastically from what they were while the owner still owned the business. Therefore, the owner must look at their estate plan at each and every phase of the business exit plan and update their estate plan accordingly.