The recent pandemic and economic crisis have led many people to reevaluate their personal financial plans. For many, financial planning and updating financial plans is an annual activity. In times like these, having a personal financial plan provides a foundation upon which to make decisions about how to proceed in the future.
Many business owners are focused on the here and now, and may have a personal financial plan but lack a solid plan for the future of their business. Eric Giltner, Senior Area Manager for the Small Business Administration (SBA), predicts in the next 10 to 15 years, approximately 70% of privately owned businesses — worth an estimated $10 trillion — will exchange hands1. This exchange will represent the largest intergenerational transfer of wealth in U.S. history. So, it is essential that business succession planning be given the same attention as personal financial planning. This will help create a foundation from which to make decisions in varying economic environments.
Here are three main areas to focus on: the history of the business, current liquidity and control options, and the future of the business.
1. Getting to know the business
- How did you get started? What have the last five years been like for the business?
- What are your most important business goals?
- Is the business financially sound? How are you dealing with any issues?
- What plans have you put in place in case of the death, disability, divorce, retirement, or withdrawal from the business of one of the owners, including yourself?
- If forced to sell the company in a short time frame, say less than one year, how would that impact the ability to receive the full market value for the business?
- Have you structured your business affairs properly to ensure appropriate transfer of your business? Are your structures tax efficient?
3. Future outlook
- What do you see as your exit strategy from the business?
- What other future plans do you have for your business?
By asking yourself these questions and working with a trusted advisor, it may help mitigate any effects should any of the following arise:
Maintaining control during difficult times
- Access to cash
- Income needs during a long-term disability or paying for long-term care
- Ability to maintain owner’s control or owner’s person of choice in control
Legacy/transfer of wealth
- What do you want your legacy to look like?
- Income tax rules and regulations are constantly changing (certain tax laws sunset in 2026)
- Integrated tax planning is particularly important if the business is structured as a pass-through entity.
Everybody has a plan whether they know it or not. In fact, not having a plan is a plan, just not a very good one. Small business owners can tend to be so focused on running the operations of their company that they sometimes fail to spend the appropriate time on personal planning, let alone business succession planning. A thorough well-thought-out financial plan should identify and address all of your financial considerations including business succession. In most cases, the value of the business is the largest asset. A trusted advisor will be able to help address the critical events that could possibly disrupt both personal and business issues.
1 Giltner, Eric. “Business Succession Planning.” U.S. Small Business Administration, 2020, www.sba.gov/content/business-succession-planning.