Exit Planning: Estate Planning

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

After several blog posts, we’ve reached the final post in our exit planning blog series. So, what does the final component of the exit planning process have in store for you? Personal wealth and estate planning!

As a note, just because this is the last step in the process, it doesn’t mean this shouldn’t be considered when you’re actually out of the business. In fact, the earlier business owners start this step, the more benefits they may receive.

It’s no surprise that the IRS lays claim to a business owner’s wealth, especially when it comes to estates. However, there are other beneficiaries a business owner might want this wealth to go to. As a business owner, you will want to have a wealth transfer method that will pass on the wealth with minimal interruption from that pesky IRS.

So, how do you go about keeping the IRS interruptions to a minimum? According to the BEI, focusing on the following three issues can help ensure success in the wealth preservation planning process.

  1. Money for Yourself – To make decisions regarding how much money should be left (to children, charities, etc.), you must first decide how much wealth you want to keep for yourself after exiting the business. This can be determined by looking at the objectives and goals you set in the beginning of your exit planning process.
  2. Money for Kids – The idea of leaving money to children after the sale of the business is a common, but sometimes difficult one. It’s often hard to decide, given the success of the business, how much is too much or too little to leave to children. It’s important to remember that children usually do not receive the full amount up front. Rather, it is transferred through trusts or over time.
  3. Minimize Tax Impact – With tax outcomes always fluctuating due to governmental policies and procedures, it’s hard to make a solid plan and know exactly how much money will be left untouched. To try to keep the amount of money taxed to a minimum, business owners (and their advisors) must be proactive.

A few other pointers for estate planning…

  • Estate Planning Preferences –Having your preferences documented can make the estate distribution process go a lot smoother. Consider including how you want personal property distributed, any personal representatives you may have, donations to charities, how the estate will be distributed, trust designs and power of attorney, to name a few.
  • Personal Lifetime Wealth Management – Understanding the decisions and actions that must take place to manage your personal wealth is crucial in making sure you obtain the highest amount upon leaving the business. It is important to consider spending strategies, estimated income and retirement, investment strategies and possible insurance strategies.
  • Wealth and Estate to Family – More than likely, you have decided to leave some part of the estate to family members, be it your children, spouse or both. Things to consider for your family include insurance proceeds, timing of income stream, transfer of assets and estate allocation preferences.
  • Protection of Personal Assets – Protecting your personal assets can enhance security of your assets against any claims against your company. Such assets to be considered may be loans to the company, collateral, ownership and rights and lifetime transfers.

Personal wealth and estate planning can help ensure you have a solid exit plan in place that is ready for whatever life may throw at you next.

In closing, we want to remind you that exit planning is a crucial step to ensure your business continues on long after it has left your hands. If done correctly, having a solid exit plan in place can help business owners be sure their dreams and goals are reached.

Exit Planning: Continuity

As a reminder, this blog series is based on The Seven Step Exit Planning Process created by the Business Enterprise Institute (BEI).

Throughout the course of this blog series, we’ve covered some important exit planning steps, such as business valuation and setting exit objectives. However, situations arise that we aren’t able to plan for.

So how do you prepare your exit plan? One word … continuity.

Business continuity planning, in its most basic sense, prepares the business owner and all related parties for unforeseen circumstances impacting the business. Events such as death of an owner or a disability are often covered in continuity planning. Continuity planning communicates the owner’s wishes regarding the continuity of the business in writing. You should also ensure it includes both short term and long term plans.

Here are a few questions to consider when starting to think about continuity planning:

  • Do you have a plan for your business if the unexpected were to happen to you?
  • Who can operate and control your business and financials if you’re gone?
  • Do your employees, specifically senior management employees, know of your plans?

While you might think it’s slightly morbid to think about, remember how important this is. Take a moment to think through these questions and then begin to draft your continuity plan based on the answers.

Here are BEI’s top five recommendations for content in a continuity plan:

  1. Extra Pay for the Extra Mile| The stay bonus plan emphasizes how critical it is for certain employees to remain with the business after your departure. Start with figuring out which employees these are and how much they’ll make for sticking around. From there, a bonus amount can be determined. The stay bonus gives these awesome employees an incentive to stick around with the business rather than jumping ship…but with a great business like yours, they’ll probably want to stay no matter what.
  2. Handing Off the Baton|This recommendation covers the terms of ownership transfer when the time comes. It allows remaining employees and/or co-owners to make the right move when transferring ownership. In other words, it makes sure all your hard work is being handled correctly. It may also include exceptions to the terms, such as transfers to family or other employees of the company in the event of an unexpected death or disability.
  3. Where’d the Money Go?| This recommendation covers what steps need to be taken in the event financial resources are no longer available to support the business. In this part of the plan, it is common to summarize the financial support of the company, such as leases, loans and lines of credits. The financials of your business can also include possible solutions in the event commonly used financial resources are no longer available.
  4. Back to the Basics| The continuity instructions cover the basic aspects of the plan on a written or electronic instruction form the owner can complete, sign and store with all other important personal planning documents. It is important to frequently review this to ensure everything is updated to match any recent changes. The instructions should include the desired future of the company which covers sale and transfer of the business. Not sure on who you want your business to go to? Check out these blogs for guidance on making this choice. In addition to who the business will be sold to, the instructions may also contain the desired price for the business, including a general price range and an absolute minimum sale price. Important information is often found in the instructions, such as important dates and deadlines and other information not easily obtained. Think of this as a game plan with all the directions clearly explained.
  5. Salary Summary| The last recommendation summarizes the plans to pay salary or compensation to the owner and the value that can be expected on departure for the business. This can include events that would trigger such payments, payment amounts and termination of payments.

Although there may be other important information to consider depending on your own unique business, these five recommendations are a good starting point for business continuity planning.

Just like all other aspects of life, change is constant and it impacts us and our business whether we are ready or not. Continuity planning helps you be prepared for these changes so your business can continue to be successful after your departure.

 

Successful Succession: Starting Early

You may have just gotten started or are barely getting going. So why would you need to think about a succession plan early on?

Succession planning is the process of identifying and developing people inside your organization to fill key leadership and ownership positions. It’s also commonly known as transition planning, as you’re looking at how you’ll transition the business to the next leader(s).

Succession planning is important to the sustainability of your business. According to Harvard Business Review, “some 70% of family-owned businesses fail or are sold before the second generation gets a chance to take over.”

For many small businesses, leadership has been in place for a number of years, and with that comes a substantial amount of knowledge that could potentially leave your organization. Further, without a solid plan in place, until the very end, you’re leaving your business’ future to chance.

So how do you get started?

Come up with a plan. Start with the owner, which may very well be you. Talk through what you want your company’s end game to look like. Do you want to sell out for the highest price? Do you want to reward employee loyalty and hand over the company to one of your hard working professionals? Do you want to keep it in the family? And then there’s the question of timing … how soon do you want any, or all, of this to happen?

Then, look at your leadership goals. Where is there talent in your organization? Is there a particular group or individual that has the support of others? Will this succession change your organizational structure? Who do you want to incentivize to stay long term?

Also, remember talent might not present itself in picture perfect form. So do you have a diamond in the rough that will take some mentoring and coaching, but in the end will be a truly great leader for your organization?

Hint: You also need to be thinking about employee retention here. You don’t want to put a lot of time and effort into someone who ends up leaving before the transition. So make sure you think through an employee retention strategy.

Throughout this entire process, make sure you are COMMUNICATING. Ensure you have buy-in from any and all stakeholders in your organization. This will include investors and key personnel.

Make a date with your business advisor. It’s important to ensure you have a plan in place that serves the culture, mission, vision and people of your organization. But it’s also vital to have outside help.

You’ll need a full cast of business advisors to ensure your succession plan is successfully in place. These characters will include:

  • Attorney to help you walk through buy/sell agreements and transaction documents.
  • Financial Advisor to help you determine that your ownership lifestyle is met, as well as help you raise funds for your buy/sell agreement.
  • Tax Professionals to help you understand the tax implications of transitioning your business.
  • Appraiser in order to help you value the business for transition, gifting or sale.
  • Estate planner, who will help you see past the sale of your business and into retirement.

Be strategic. It’s important to be strategic as you prepare your succession plan and not just look at the current state of your operation. Succession planning should focus on growth, retention of talent and improve processes.

And one final thought … if all of this seems like a lot of work, that’s because it is. So don’t start at the end. Start early so you’re prepared to go forward with the end in mind.