Successfully transitioning ownership and management of their business to the next generation is something that’s on every business owner’s mind. And their goal is to achieve financial freedom in the process. However, many business owners don’t know where to start or what to do. A recent study revealed that only about 50% of business owners have figured out what their financial needs are, discussed it with family, believe they’ve built sufficient business value, and discussed it with internal parties. Further, about 6% of business owners haven’t given any thought at all about their business exit.
It’s hard to believe that the other 50% haven’t taken each of these steps fully. But I’ve found that many business owners are working in the business and don’t take time to work on the business. While it’s typically the largest asset they own, minimal planning has been done to monetize it. Actions speak louder than words.
Experience tells me that one day retirement rears its head, and it’s not until this point that many owners realize that they haven’t done any significant planning on ownership or management succession. I have one client who’s 75 and is trying to craft a plan to transfer ownership and management. Another owner is approaching 70 and has been working on his exit plan for about a year now. I have another client who is 60 and has done little to no planning for retirement or how to exit the business and is just beginning to start this year.
A quick way to determine your financial needs is to take your annual compensation, determine how much of that you’ll need in retirement (80% is a good place to start), determine your life expectancy (at age 65, maybe 30 years), and determine an investment return you’ll earn on your retirement assets and make an annuity calculation. For example, if you want $200,000 per year for the next 30 years, and assume an investment return over that time of 7%, then you need $2.4 million in retirement assets to achieve that without Social Security income. If you want to include Social Security, then deduct it from your annual income.
As a reminder to be sure you’ve built sufficient business value, make sure you calculate the net value, not the gross value of the business. If you sell the assets of the business, you’ll need to pay off any debt and there will be taxes paid on the transaction as either capital gains or ordinary income. If you sell the stock, there will be capital gains tax paid on the value more than the basis of your stock.
Don’t bury yourself in the business and then one day expect to maximize its value without doing any significant planning. A dream without a plan is just a wish. Build time on your calendar to do the hard work of conceptualizing and planning your ownership and management transition plan. The value of your business depends on it!
