Succession Success

Many business owners find their wealth is tied up mostly in their businesses, which provides well for them and their families.

When it comes to protecting their businesses, however, these owners often have not quantified how they would replace their income when the time comes for them to exit or sell their businesses and retire.

Retirement is an emotional, financial and timing issue for business owners. It has many facets.

Business owners should be aware of five issues or concerns associated with business succession and address them with their financial advisors in advance of acting. Together, a business owner and his or her advisors will want to ensure they have in place a way to mitigate the risks associated with this single asset, the business.

ASSET DIVERSIFICATION
First, the recent economic malaise has brought home the concerns about business owners relying on their businesses alone to fund their retirements. Just as an individual’s investments should be diversified, so should his or her assets. Though it may be difficult to do in a challenging business climate, business owners should accumulate and save retirement assets away from their businesses to make progress toward retirement planning.

IS SELLING AN OPTION?
Second, business owners must consider whether their businesses are an asset they can sell. Whether or not a business owner can find a buyer for his or her business depends on a variety of factors, including whether there are employees or partners who could continue to run the business after the owner retires or whether the business is the type to attract outside buyers.

For example, companies that produce tangible goods and have positive cash flow often can be sold. On the other hand, specialty firms that rely on the owner’s and the owner’s skills alone, such as boutique consulting firms, are generally not salable. The truth is most businesses fall somewhere in between.

 
WILL THE PROCEEDS LAST?
Third, if a business owner is able to sell his or her company and pay the taxes on the gains, would the proceeds be enough to last for the rest of his or her life? How would the business owner derive a similar level of income in retirement that he or she now enjoys from the business?

Business owners likely work very hard and their dedicated efforts are an important ingredient to their success. The investment returns from a growing business may well exceed the investment returns from a prudent investment portfolio. In the long run, however, the income derived from a business owner’s valuable work ethic simply may not be replaceable. Business owners are often optimists by nature and they take risks to grow their businesses. However, the risk of putting all of an individual’s eggs in one basket may not work as well when it comes time to build an investment portfolio.  

HANDLING THE UNFORESEEN
Fourth, what happens if a business owner cannot be involved in running his or her business any longer? Stories abound about professionals 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 a 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. Additionally, the agreement may establish a funding mechanism to facilitate the purchase of an owner’s interest in such cases.

NO SALE
Finally, business owners must consider whether they have a plan in place that will allow them to retire regardless of a sale. The current business environment is a reminder that a business owner may not be able to sell his or her business at a precise time that is in line with his or her wishes.

Planning for succession in a small business is a priority of the first order. It begins with the objectives a business owner wants to achieve.

Business owners should talk through these concerns with their financial advisors to ensure they have the plan, the capital and the agreements in place to transition their businesses when the time is right or events require. 

See our web extra: Could My Family Benefit from a Family Limited Partnership? 

This article was written by Wells Fargo Advisors and provided courtesy of Kristopher Venne in Syracuse, N.Y. Venne can be contacted at 800-448-5773 or through www.bombardcavanaugh.com. Investments in securities and insurance products are not FDIC-insured, not bank-guaranteed and may lose value. Wells Fargo Advisors LLC, member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Co. Wells Fargo Advisors does not render legal or tax advice.