business builder personal finance
Don’t let golden
goose turn into
white elephant
by Laurie Laner
Business owners take on many extras during their careers — extra decisions, extra responsibilities, extra aggravations, extra hours. All the blood, sweat, tears and money isn’t just to create more flexibility and independence. Your business is supposed to bring extra wealth, too.
Yet, too often, a business owner’s retirement dreams turn into nightmares at impractical times and the beloved golden goose becomes a white elephant: Your industry goes into a slump just as you are ready to retire, or you unexpectedly develop health issues that force an earlier retirement date, or perhaps your chosen successor is running the ship into the rocks — to name just a few retirement-wreckers.
Here are some practical suggestions to make sure that your sweat equity will pay off royally when and how you want it to.
1. Develop a written retirement strategy. Doing a 360-degree/holistic review of your life plan will focus your business and work productivity in unimaginable ways.
Ask yourself: What is my dream? At what age do I want to retire? Where do I want to be living when I do? What is the minimum acceptable income and what is the “rosier retirement” income need?
Then, take the time to have a financial planning professional calculate how much capital it will take for you to make your dream a reality. Having quantifiable goals that are reviewed regularly will greatly increase your likelihood of success.
2. Build a business that is “buy-able” and not so owner-centric. As you grow your business, build systems and mechanisms that are not so reliant on your personal touch.
Too often businesses rely on the owner to be the catalyst as well as the WD-40 for profitability. Your end goal is to figure out how to develop the business to run smoothly without you. Making decisions and building systems with the end in mind will increase the likelihood of your business running successfully long after you’re gone.
3. Start succession planning early. And be incredibly thorough. It is never too early to have a succession plan in place. You can always alter it as your business and your perspective change over time.
• Valuate your business. Calculate the worth of your business.
• Plan your exit strategy. Plot your departure with as many “what ifs” as possible.
• Meet with potential successors. Whether this involves family or unrelated parties, conduct in-depth discussions with these people to assess interests and fit.
• Develop a clear business plan for the near and long term. Arm this plan with budgets and forecasts that are adaptable to changing economic conditions.
• Choose a transfer strategy. Whether it be a business buyout, an employee stock ownership plan (ESOP), or gifting to family members, bind it with the appropriate legal documents.
• Plan for contingencies. Plan for what you will do if you become disabled or die unexpectedly so that you or your family will be cared for. Design more than one strategy for a business transfer in case Plan A fails.
4. Developing your successor(s). Often, the best exit strategy is training your own successor. You can eliminate quite a bit of chance if you aren’t waiting for the right offer, hoping that the price is right, dodging health problems, or searching for a perfect fit for your particular business.
• Be cautious. Make sure your heir apparent is the right person in terms of temperament, personality, competence and personal goals.
• Date, then get engaged, then get married. Use a period of time to see how things work out before any legal documents are ever drafted. Use the same rules for family members as for outsiders.
• Use golden handcuffs and incentives. Layer the transition with challenges and goals. The ambitious successor needs and deserves gradually increasing authority and benefits such as deferred compensation or the opportunity to acquire partial ownership prior to your retirement.
• State clearly your agreement in a legal document. Lock everything in writing, spelling out all details along with a valuation formula in a buy-sell agreement. Remember to include a clause for termination if needed.
• Create a funding mechanism. Beyond the legal agreement, funding is critical, whether via a bank loan, a payment plan from profits, salary continuation, or other options. Backing up the plan with life and disability insurance on the key players is essential.
• Employ professional coaching. An outside, objective person is usually recommended. You will likely have some trouble separating yourself from your life’s work. And a family business adviser has worked through transition issues many times before and will be able to guide you around many potholes.
5. Diversify your holdings. In real estate, nothing is more important than location. In retirement planning, nothing is more important than diversification and contingency planning.
This step is particularly difficult because business owner want to feed their own businesses first. And cash flow may be a nagging, ongoing problem. Nonetheless, you must force yourself to set up a mechanism to invest in the stock market through your company.
• Choose a retirement plan that fits your company’s needs. Identify your objectives whether they are employee retention or maximum retirement funding for the owner. Review maximum amount of yearly contributions, setup difficulty, administrative complexity and costs, as well as tax ramifications.
• Consider some of the new plans which are flexible and easy to administer such as SIMPLE plans. In 2004, employees may contribute as much as $9,000 pre-tax contribution with either a mandatory or discretionary employer contribution of between 2 percent and 3 percent.
• Or consider some of the older plans that can be tipped in favor of the owner or higher paid executives such as defined benefit plans, which may allow for more favorable treatment of longer-term and higher-income employees.
• Fund your plans carefully with a written investment policy and carefully selected investment vehicles. You should consider these dollars as foundation monies, not a stock playpen. Remember this is an important diversification tool in your retirement toolbox.
If you use mutual funds, look at expense ratios, track records, and asset movement in and out of the funds. And, the last thing you need is unhappy employees or a lawsuit because of the plan’s performance. Provide annual education for your employees if they are self-directing their investments.
6. Health insurance: an expense line item you simply cannot forget. In planning retirement, health insurance has become a critical factor. Will you continue on the company plan? Will you pay for your own plan? Have you examined long-term care insurance? Can any of these items be included in your exit strategy payment plan?
Your golden goose needs many different kinds of tender loving care. Working day in, day out to fatten your goose is not enough. Planning for your retirement, the succession of your business, and your ongoing health care must be part of your daily rigors.
[contact] Laurie Laner, CFP, is with Financial Designs Inc. in St. Louis Park and assists business owners and others with financial planning: 952.843.0300; laurie@FDI-online.com; www.FDI-online.com
