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Business owners are hardworking, smart and usually successful individuals. They tend to be masters of planning for profitability now and may not prepare and plan for tomorrow because they are constantly putting out fires today.
There are only three things certain in life: death, taxes and that a business owner will exit their business someday. If you own a business, you need to plan for this exit in advance.
Why is your exit from your business so important to retirement?
You may view your business as your retirement nest egg, which means your retirement is dependent on how much you sell your business for when you exit. Your wealth is tied up in your business, but do you have a plan on how to get it out? There are many potential pitfalls for not planning how to leave your business in advance. So, how can you avoid them?
Maximizing your retirement doesn’t need to be a gamble.
If you prepare in advance, you can eliminate or minimize many of the issues that can arise when you want to exit your business. Start thinking about your exit 3, 5, or 10 years in advance. The longer you prepare, the higher the likelihood of the outcome you desire.
It’s also important to prepare a backup option. You may think your manager or your daughter will take over when you’re ready to go. But what if they can’t or don’t want to? Do you want to be forced to fire sale your life’s work, or worse, be forced to work far longer than you desired? Having an alternative plan is that backup parachute you hope you never have to use but are happy you have if you end up needing it.
When it’s time, make sure the business is in sellable shape. Just like when you sell a house, you want it to look as appealing as possible to a potential buyer. This includes:
• Maintaining and updating your operating agreement as needed. Your operating agreement says a lot about the business’s financial and functional decisions. Does it match what you are currently doing? Does it explicitly exclude or allow for the type of transaction you envision for your exit?
• If there are multiple owners, always maintain and update your buy/sell agreement. Partnerships are like marriages: When things are good, they are really good, but when it comes time to break up, it can get ugly. Have an agreement that reflects the proper value of your business and explicitly states how the business transfers if certain situations arise, like the death or disability of a partner.
• Maintain employment contracts that incentivize employees to stay after your departure. This could include a “stay bonus” or “golden handcuffs” to reward them for staying after you’re gone. Key employees are vital to the profitability and growth of a business. When someone buys your business, they want to make sure these people are staying in place.
• Protect your business from key employees’ unexpected departure or incapacity with key person insurance policies. Just as it’s important to protect your business from an employee leaving when you exit, you must protect the business if something happens to them before you leave, which could have the same negative impact, but causes you to bear the brunt of the loss, not the buyer.
• Protect your intellectual property. Most owners don’t realize there was something they needed to protect until it was too late. Many owners don’t realize some things they do are unique and an asset, which enhances the value of their business. Look at what makes your business unique, and explore if you can protect anything as a trade secret or patentable process or device.
• Maintain vendor contracts or leases that are transferable. Vendor contracts and leases are direct line items that affect a company’s profitability. Are they voidable on a material change in ownership? You want to have the ability to transfer these items, as they can drastically change the value of your business if lost. If you have a restaurant in a key location, what value does the restaurant have if, upon sale, the landlord can triple the rent or kick out the new owner?
Work with an experienced team of advisors from the minute leaving even becomes a thought. This should include a Certified Exit Planner (CExP), a business attorney, a CPA, a financial advisor, a business consultant, a valuation expert and others, depending on the nature of the business. Each will have valuable input from different perspectives that are necessary to avoid pitfalls.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 990 STEWART AVE SUITE 200, GARDEN CITY, NY 11530, ph#516-745-5600. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. National Financial Network is not an affiliate or subsidiary of PAS or Guardian. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. 2019-77238 Exp 04/21
April 26, 2019 at 08:36AM
Forbes – Entrepreneurs