How to Proactively Plan for Retirement

Part 1: Transitioning your business

In this first installment of a weekly series, Tax Advisor Mary Ann Donahoe discusses some key areas to consider when preparing to sell or pass on your business

At MRSB a core concern for our clients is whether they are taking the steps necessary to ensure a smooth transition into a comfortable, worry-free retirement.  No one wants to scramble at 65 to make ends meet or be up to their necks in paperwork. You’d rather be on a beach or a boat somewhere, celebrating a successful career in style! Well, this dream isn’t attainable for everyone, but for the owner of a profitable business it should sure be the goal.

...each engagement is tailored to the individual client and their business; this leads to recommendations that help ensure a smooth transition into retirement.

 

After countless client engagements on the topic of retirement planning we have identified several areas that many business owners either have questions about or haven’t started thinking about yet. To address this our tax and accounting teams have developed a unique meeting style approach to retirement planning. The Comprehensive Review & Tax Planning (CRTP) process encompasses a number of areas of concern for business owners and is unique in that each engagement is tailored to the individual client and their business; this leads to recommendations that help ensure a smooth transition into retirement.

This series will identify and briefly discuss several topics that every business owner should consider, and that are covered at length during the CRTP process. This week we will start with transitioning your business.

Who will take over?

Have you thought about who is going to keep your business running once you are ready to pass on the torch? There are three main options: you might decide to sell or pass the business on to your children, sell to current employees or sell to a third party. Each of these options requires careful planning to ensure the transition happens on schedule (i.e. when you actually want to retire) and that the business is ready for its new owner(s).  Even if you are years away from this decision, it isn’t too early to make preliminary plans.

Selling or giving to children

In our experience a majority of businesses transitions are family transitions, meaning the company is passed on or sold to children or other family members. If selling to more than one child, have you decided how ownership will be split between them? Will you be transitioning wealth to any non-participating children?

It’s also important to think about whether your children are ready for the full responsibility of owning their own business and whether they require any training or mentoring beforehand. Instead of selling the business outright you may decide that a slow transition is a better option. In any case, there are tax issues to be taken into account to ensure that everyone receives the maximum tax planning benefits as a result of the transition and that the business remains strong.

It’s also important to think about whether your children are ready for the full responsibility of owning their own business and whether they require any training or mentoring beforehand.

Selling to current employee(s)

One option that can be very beneficial to you and the business is to sell to an interested employee, which eliminates the need to find a buyer. Some of the same

 considerations as when selling to children need to be analyzed if it is an employee who wants to take over the business, such as whether they are ready for full responsibility and whether they require mentoring.

The financing arrangements in an employee take-over are different than when selling to family, and can vary depending on the wealth of the purchaser. If your employee has enough capital to purchase the business outright, fine. But do you want to do this knowing that there will be no gradual transition period? If your employee doesn’t have the capital, are you OK with doing a partial transition of business? Would you consider a vendor take-back? These are all answerable questions, they just require some careful consideration of all available options.

Selling to a third party

Selling your business to an outsider is often the most demanding course of action as it requires extra diligence on your part, both to protect yourself and the buyer. Even finding the right buyer can be challenging, and hiring a broker might be a necessary step as they can not only find the buying party but assist you throughout the selling process.

A key consideration when selling to a third party is whether there is opportunity for you to enhance the value of your business, resulting in a better asking price. A business valuator can help you identify the key value drivers of your business and provide a solution for leveraging them. For example, identifying ways to improve cash flow, minimizing perceived risk for buyers and transforming personal goodwill into saleable goodwill are all areas a valuation expert can help with. Selling to a third party can also take considerable time so planning ahead is key.

A key consideration when selling to a third party is whether there is opportunity for you to enhance the value of your business, resulting in a better asking price.

The above are just some of the steps and considerations we walk you through in our CRTP meeting, all of which lead to the development of a retirement plan that works for you. Of course, every business is different and you may feel you need further advice on any or all of the above, or on something we haven’t covered yet. Next week’s post will discuss tax and estate planning and how these might factor into your future business plans.