As wealth advisors, one of the most valuable things we do for our clients is prompt questions that they are not already thinking about. We are all aware of the concept of FAQs or Frequently Asked Questions, but we would emphasize the importance of “Infrequently Asked Questions” as well.
It’s often the things you don’t know to ask that can cause real problems down the road or allow you to miss opportunities. This is particularly true for owners of closely-held businesses where there is an increased level of complexity to consider.
The following is a list of questions that we would recommend that business owners consider, along with a recommended action item associated with each.
MAXIMIZING THE VALUE OF THE BUSINESS:
- Have you considered the possible loss of income and capital erosion that often results during a period of business transition? By planning 3-5 years in advance of a transition, you can be better prepared and more likely to maximize the value of your business when you exit.
- Have you considered whether you will offer incentive compensation or bonuses to key employees in order to help retain and motivate them? In conjunction with an incentive compensation plan, you may want to ensure that you have an updated employment agreement in place to protect intellectual property and ensure non-solicitation of customers.
- Is your business able to function without you (or other owners)? If you were to take a one-month vacation, would the business still operate smoothly? Could appropriate decisions still be made in your absence? The less reliant your business is on any particular individual, the more attractive it is to a potential purchaser.
- Are you confident that the business will be run effectively if you are no longer involved? Ensure that you have documents in place that provide direction as to how any leadership changes will occur in the result of an unplanned exit. That plan for business continuity should involve both operational and strategic leadership.
- Have you had anyone look at your estate documents and do a “fire drill” to see if there are any potential problems with your current plan? It can make sense to have a qualified advisor or attorney review your estate documents to ensure that nothing is missing and raise questions to ensure that you have appointed the right people to serve in various capacities (i.e., trustee, guardian, executor, etc.).
- Are you actively harvesting losses in your portfolio in order to offset capital gains from a future liquidity event? Consider utilizing an active tax minimization strategy to proactively (and temporarily) sell securities within your portfolio that have incurred losses. Those accumulated losses will then be available to carry forward and use to offset future taxable gains.
- Have you done any planning in advance of a potential sale that may enable you to reduce your tax liability? If philanthropy is important to you, consider doing some charitable planning in advance of a sale. For example, a Charitable Remainder Trust could reduce your taxes while creating a lifetime stream of income for you.
- Do you know if your company’s retirement plan type enables you to maximize your tax-deductible retirement contributions? Depending on the size of your business, certain retirement plan designs allow for higher contribution limits. Evaluate a Defined Benefit or Cash Balance Plan to see if they can help save you money on taxes by increasing the amount of tax-deductible contributions you can make.
ACHIEVING A SUCCESSFUL RETIREMENT:
- Have you thought about your ideal life once you leave the business? Consider the ways you’d like to spend your time. What things would you like to do? What relationships are most important to you? Do you intend to continue to work or begin volunteering in some capacity?
- How dependent is your retirement on the business? Most business owners have the majority of their net worth in the business itself. Take steps to mitigate personal risk tied to the business.
- Based on your anticipated living expenses and financial goals, do you know how much you need to be financially independent? Calculate the net present value of your retirement funding need (in today’s dollars) and compare that with the value of your total investable assets. Knowing your “number” will provide you with confidence as go through the due diligence process of preparing for a sale.
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