Business succession – what happens to your business once you no longer choose to or are able to run it – is one of the most important and often overlooked issues small business owners face. As you launch your business and get it up and running, your focus is on maintaining and growing that business. Like many issues that involve planning for later in life, it can be unpleasant to think about what will happen when you are no longer able to do what you are doing now.
Unfortunately, a failure to plan can result in the unnecessary end to your business, cost you money and impact the security of future income. Creating your “exit strategy” by establishing a strong plan for succession ensures your business is protected and is one of the most important things you can do as a business owner. A strong exit strategy ensures:
- Business partners are not left dealing with complicated issues if your exit comes suddenly or prematurely.
- Insurance benefits are immediately available to pay for your share of the business, so there is no risk of external takeover or a need to force the sale of the business.
- A timely settlement of your estate, saving your family inconvenience, cost, and further emotional trauma.
Creating Your Business Succession Plan
According to the Family Business Institute, despite the assumption of nearly 90% of current business owners that their family will take over the business, only about 30% of these businesses survive into the second generation. Creating a succession plan ensures your family has the option of taking over the business, but it also allows them the freedom to choose not do so without losing money or forcing the business to fail. How can you create a realistic succession plan?
First, choose a successor. If you want your business to continue on in the hands of a family member, employee, or someone else, put a plan in place now. This gives you an opportunity to discuss succession with the appropriate people and determine if what you envision is also what your successor wants.
Next, choose the legal arrangement for succession. Your options include cross-purchase agreements or entity-purchase agreements. The former is structured so that all of the owners buy and own separate life insurance policies on each of the other owners. Each owner is a policy holder and beneficiary. Should one die, the life insurance proceeds are used to purchase the share of the business that belonged to the deceased. This arrangement only makes sense in businesses where there are few owners.
An entity-purchase agreement is less complicated because it usually involves the purchase of fewer life insurance policies. Such an agreement is structured so that only the business purchases separate life insurance policies on each of the owners. The business acts as both policy holder and beneficiary. If any owner dies, the business uses the proceeds of that owner’s insurance policy to purchase the share of the business that belonged to the deceased.
Your business does not need to end with you, but careful planning on your part is required while you are still here. The sooner you put a plan in place, the better for everyone involved.
It is never too early to begin retirement planning. Unfortunately, many people put it off. If you are wondering what you can do now to ensure you are set for retirement – even if it is decades into the future – consider these five tips.
Consider Your Retirement Activity Plans
People dream of their retirement, expecting to be comfortable. But many are unsure how to make the transition to a “life of leisure” once the time arrives. In order to make sure you have enough money to truly have leisure time, you need to determine how that time will be spent.
Are there dreams you have postponed until after you stop working? Do you want to travel? Are you hoping to stay active in your community? Will you be sharing the activities of your retirement with an also-retired spouse? The important thing is to get a handle on your retirement activity plans, so you can do what it takes now to make these dreams a reality.
Create a Savings Goal
Once you know how you intend to spend your retirement years, you can begin planning how much money it will take to live that way without a steady employment income.
Questions to ask yourself:
- Realistically, how much will it take to maintain your current lifestyle?
- Do you plan to drastically change that lifestyle once you retire?
- What will you add and subtract from the way you live now?
- What does your retirement income future look like, including savings, social security, pensions, etc?
Your goal is to create a ballpark figure you can work toward that will allow you to make your retirement dreams a reality. Once you have a number range in mind, you can better plan to accomplish that savings nest egg goal.
In addition to saving money for healthcare costs as you get older, there are a few specific things you can do now and in the years leading up to retirement that will help you ease the financial burden of your health as you get older. Investing in long-term care insurance is one of the best moves you can make now to protect you in the future. Some say it can be costly, but should you become seriously ill in your senior years long-term care insurance will help protect your savings by paying for a large part of the medical expenses. Plans vary so shop around.
The sooner you begin to pay down your debts the better your retirement funds will be. Avoid taking on any high-interest debt as you near retirement and focus on paying your higher interest loans as soon as possible. Ideally, you will have no debt by the time you reach retirement, but if this is unreasonable, focus on reducing it as much as possible.
Hire a Financial Advisor
If you are not already working with an expert to help you plan for retirement, now is the time to find someone. Your investment needs are going to change over the years and having a professional in your corner can really make things easier. Discuss the plans you have for retirement with your financial planner and let him or her help you create a plan that will get you to the point you want to be by retirement age.
The most important thing to remember about retiring is there are very few rules that are hard and fast that apply to every situation. Some people don’t even want to retire because they enjoy working and fear they will get bored with no job. Others want to retire earlier than usual or are willing to work just a few extra years to build up additional savings. Every individual has his or her own unique situation and should plan accordingly so retirement can be an exciting life transition.