You’ve followed your dream, overcome challenges and created a successful business that has been rewarding from a personal and professional standpoint. It has taken years of commitment and hard work to get there, but now you’re faced with some of the most important decisions of your life as you peer over the horizon toward retirement.
Planning for retirement can be challenging because it forces us to consider what happens when we leave behind a community of work relationships that have played a huge part in our lives. There are many questions to answer, starting with: What will I do? Where will we live? Will we be financially secure and maintain the lifestyle that we want?
Retirement means different things to people in different situations, and there are no “one size fits all” answers. This is especially true for business owners who are heavily vested from a personal and financial perspective. Many are hesitant to begin succession planning. As the National Association for Corporate Directors notes, more than 75% of privately held businesses have no formal succession plan. This can invite uncertainty and disruption, which can impact competitiveness and sustainability.
Retirement requires a leap of faith for you as a business owner. You’re accustomed to leading your team to operate the business, and now you’re faced with the prospect of having to build a team of experts who will help to sustain the business in your absence and provide you with the financial security to achieve life and legacy goals during your retirement years.
If your plan is to sell the business, the first step is to do some strategic planning about what the future of your business will look like, to maximize the sale value. Some factors that have an impact on valuation are the efficiency of processes, age of equipment, continuity with key people, market share and solid financial statements. Buyers are likely to look closely at earnings history, sales growth and industry conditions, because they are good predictors of future cash flows.
The process involves setting goals, charting a course to achieving them and identifying who will be the key leaders to carry things forward after your transition. These leaders may be family members, employees or you may be considering a sale to an outside third party. Each of these scenarios requires professional expertise in different areas as you think about how to structure the deal so that you’ll have sufficient cash flow once you’re no longer on the payroll.
Your CPA firm can be a key advisor in getting the financials in shape and providing you with assistance in valuing the business. Once you’re ready, you may want to engage the services of a business broker who can help with evaluating industry conditions and identifying potential buyers. You’ll be asked to make many decisions, some based on your preferences and others on the goal of structuring the best deal possible.
Does the deal involve a single cash payment or a series of payouts over time? Do you want to continue to be involved to some degree on a day-to-day basis? Should the ownership structure be a corporation or partnership? You’ll want to work closely with your tax and legal advisors to see the best options for your situation.
As the pieces of the deal are coming together, consider how to replace the cash flow when you are no longer drawing a salary. This involves creating a budget so that you know the amount you will be spending each month to maintain your lifestyle.
There may continue to be ongoing payouts from the company, but it is likely that you will require the services of a professional investment manager who can work with you to create a financial plan that focuses on your objectives.
A thoughtful plan considers your risk tolerance, cash flow needs, current investments, tax implications, and investment strategy to build an investment portfolio customized to your needs. Experience in managing risk is a key element that a professional manager brings to the equation, as they offer a disciplined approach to managing the asset allocation and selecting investments.
Once you have a plan to replace cash flow, it’s time to consider how to protect and transfer assets to loved ones, charitable organizations, or other parties, depending on your situation and wishes. This requires the help of a trust and estates attorney who can advise you on the right vehicles to do this in the most tax-efficient manner.
There are many benefits to using trusts, including managing assets more efficiently, protecting assets, providing privacy, avoiding probate, providing for multiple beneficiaries and tax planning. Your attorney can advise you on how to create a plan that navigates the estate and gift tax landscape in your jurisdiction so that your wishes can be carried out with the maximum benefit during your lifetime and after you’re gone.
Bringing these elements together will allow you to enjoy your retirement with the satisfaction of creating an impactful legacy for your loved ones and the causes that matter to you.
Charlie Mathews is senior wealth management consultant for NBT Wealth Management.
