When owners begin to create their business transition plans, they need to answer three critical questions:-
- When do they want to leave their business?
- What do they want to do after they leave their business?; and
- How much money do they need when they leave?
The answers to these questions fix a destination that business transition planning aims to reach.
Many owners answer, “I can live on a lot less income once I leave the business”, when tackling the third question. Maybe they can. Maybe they can’t.
I like to raise factors for their consideration before they finalise their financial goals.
Many owners assume that they can because they look back at their income needs over the years and assume that their needs will decrease—the children are gone, the house is paid off, etc.
Circumstances change, but it is just as likely that your needs may increase. Tax rates and health care costs will increase. Few of us will enjoy perfect health until we die. The needs of our loved ones change as well. While we launch our children into the world, we often are called upon to meet the needs of aging parents.
None of us can predict how the world will affect our investment portfolios. Rising energy costs, new technologies, natural disasters, civil unrest, wars and terrorism can all play havoc with the most conservative portfolio.
To those who count on rent from the building they owned and plan to lease back to the buyer of their businesses, I would ask, “What happens if the new owner can no longer pay?”
I am not a soothsayer of doom and destruction, but it would be irresponsible not to point out that active business owners can adapt to change more easily because they still control their source of income. Owners enjoy greater flexibility because their actions (working more, laying off personnel, reducing business expenses) directly affect their income.
Once retired and dependent on investment income, your range of options is limited, and those actions you can take often involve increasing your risk.
What are the solutions?
One is to acquire considerably more assets than you think you need. Add this enhanced asset amount to the amount of money you want to receive when you leave your business. Have a large margin of error. Of course, this is easier said than done.
To help accomplish this, you may need to stay in your business longer than you planned so you can grow business value or accumulate more money outside of the business and in your retirement account.
Another solution is to engage an experienced financial professional who can help you:-
(1) analyze what you are spending now;
(2) understand what your likely needs and wants are; and
(3) anticipate future needs and sources and amounts of income.
These professionals have access to large amounts of research and historical data. While no one can tell you how your investments may perform in the future or what to expect on the world scene, they can help you assess risk.
Expert financial planning not only helps you assess risk but also helps you to determine the appropriate response to mitigate that risk—whether it be to build more value before you exit, delay your exit or realistically appraise the possibility that your lifestyle may need to be more modest.
Is it not worth your time, and perhaps some money, to help ascertain that your financial goals are realistic and that you can weather the unforeseen and unexpected?
Because in today’s world, if it’s one thing we can be certain of – your circumstances and everyone else’s – will change.
The information contained in this article is general in nature and is not legal, tax or financial advice. Contact a lawyer or a tax or financial professional for information regarding your particular situation. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. Clients should consult their legal, accounting, tax or financial professional in specific cases. This article is not intended to give advice or represent our firm as qualified to advise on all areas of professional services. Master Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice you need.
Any examples provided are for illustrative purposes only. Examples may include fictitious names and may not represent any particular person or entity. This article has been sourced from a licence agreement with Business Enterprise Institute, Inc.
