Many times, business owners have an unrealistic expectation of what their business is worth. They plan on it becoming a retirement asset. Sometimes this works but many times it does not. I know a number of business owners who do not have a retirement plan in place. It can be a big mistake to rely on the sale of your business to provide the entirety of your retirement plan. Some of the risks include changes in consumer preferences, competition, technology and innovation that sink established businesses. For these reasons I strongly advise that you diversify your assets so you have different buckets to rely on when the time comes.
Fourteen succession planning questions you need answers for:
- What do you see your business looking like in five years, in 10 years?
- For the best financial future for you and your family, do you see yourself keeping your business recognizing that you will have to keep investing more money in it? Or do you see selling it and investing the proceeds elsewhere?
- Is your focus to sell for the highest price or to keep it in the family for the long term?
- If you are considering family, who has the right skills, the drive and can commit the time it will take? First ask if anyone in your family wants to buy into the business.
- If it is a family member, does that person really want to take over? Have you considered splitting the assets so the children not involved in the business are not financially left out? A family meeting is a good place to discuss this.
- How will the child be transferred the shares? Will it be a gift? (Unlikely.) Will the child buy the shares by taking out a bank loan, by a promissory note, gradually buy the parents’ shares or
inherit the shares when both parents die? In each case there are issues that come up that can be resolved with a specific insurance solution that needs to be explored.
- Will it be sold to a third party, family member or an employee? Look to see if there is interest from shareholders, partners or employees, customers or suppliers and then consider competitors.
- What happens if you die unexpectedly?
- What is the plan for when you retire? What is your exit strategy? How do you intend to unlock the value of your business when you retire?
- Have you had a proper valuation done on your business? What method did they use to calculate it?
- Consider such things as who will be appointed to what positions in the company.
- Consider who owns the shares, what type of shares they have and who has voting control of the company.
- What is the price you will get for your business? How will you be paid for it? Will you still stay on in a transition period? What will you be paid for this?
- Is your aim to sell the shares? Or your assets? Sellers prefer to sell shares so they can take advantage of the small business capital gain exemption of $813,600, while buyers prefer to buy assets so they don’t inherit any company liabilities. You will need to get a proper business valuation.
Six main goals that most entrepreneurs want to accomplish in their exit strategy:
Have you planned for these?
- Keep the business going in some form.
- Sustain the value of the business.
- Reduce or defer tax.
- Establish enough retirement income.
- Plan that when you die, your spouse has enough to live comfortably.
- Keep harmony among the kids once both parents have gone.
If you are like most entrepreneurs, your business is your baby, and not only is it a source of pride but it is likely you have spent more time in your business than with your family.
I have software specifically designed to compare:
- The net amount of your estate that is designed to go to your beneficiaries if you died yesterday, versus the net amount that can go to your estate after each solution we create.
- The amount of estate shrinkage that will be triggered by taxes if you die today, versus the amount of estate shrinkage once we implement some insurance strategies.
Five concepts you want to know:
- Transfer money tax free to your grandchildren through a life insurance policy.
- What cheque would you rather write?
- The two percent solution.
- Transfer your wealth to the grandkids.
- The cloaked estate.
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