by Intuitive Digital | Aug 13, 2013 | Advice
Continuing our review of the six common mistakes that can destroy businesses, we now turn to the fourth mistake: procrastination about retirement and succession planning.
Answer the following questions to see if your company is vulnerable:
• Does the owner know when he or she wants to retire?
• Does the owner know how much income is needed in retirement?
• Does the owner want to be running the company full-time five years from now?
• Does the owner know how much control he or she must maintain over the business to ensure retirement income?
• Has the owner explored financing opportunities for key employees to buy the company in the future?
The more “no” answers, the greater the risk. How does your company look?
Retirement means different things to different people, but one thing is certain – you’ll need enough money to live on. That means figuring out a budget and knowing how you’ll pay for it.
If you don’t want to work forever, then you need a plan to fund your requirement. And if that means selling the business, do you have a ready, willing, and (financially) able existing employee or family member to take over? If so, you will want to make sure that there is a business left for him or her to run when you step down. If there isn’t, you’ll be looking at a strategic or financial buyer outside the company. Either way there will likely be a transition period where the current owner relinquishes the reins and phases out of the business.
As we noted last month, the absence of a clear succession plan creates ambiguity at best, and a vicious power struggle or inability to continue operating the company at worst. Take the time now to plan your retirement objectives and ensure the success of the business in the hands of the next generation.
by Intuitive Digital | Aug 8, 2013 | Advice
The blog continues today with our ongoing discussion of the six common mistakes that can destroy businesses. The third mistake is failing to have a succession plan that spells out who takes over the company if the owner becomes temporarily or permanently unable to run the business.
Answer the following questions to see if your company is vulnerable:
• Is there a formal succession plan on file?
• Does the succession plan address disability?
• Has the owner involved key employees and family members in succession planning?
• Has the owner identified in writing who he or she wants to take over the company?
• Do the owner’s family members and employees know who is going to run the company?
• Does the owner have disability buy-sell or overhead expense insurance?
• Does the owner have contribution protection for his or her retirement account if disabled?
The more “no” answers, the greater the risk. How does your company look?
The impact of losing an owner or high performing employee on a temporary – or permanent – basis cannot be overstated. Two steps that will help avoid these problems are disability insurance to provide needed funds to avoid drawing down cash reserves and a written succession plan that provides an interim or new management.
Disability insurance can help replace after-tax income and may also provide benefits to pay ongoing overhead costs of the business. Some policies also have a lump-sum payout option similar to a death benefit on a life insurance policy which might be used to buy out an owner’s interest if the disability is permanent and he or she can’t return to the company. Emergency or short term contingency planning – which usually requires cross-training or cash reserves to hire replacement employees – is also essential to make sure that the company can survive a temporary loss.
by Intuitive Digital | Aug 6, 2013 | Advice
In today’s post we’ll continue our review of the six common mistakes that can destroy businesses. The second mistake is failing to do estate planning, and specifically the failure to accurately estimate (and pay for) any tax liabilities that result from a business owner transferring ownership via a will or trust.
Answer the following questions to see if your company is vulnerable:
• Does the owner have a will or trust and is it up to date?
• Does the owner have a living will AKA “pull the plug” instructions?
• Does the owner have a plan to retain key employees if something happens to him or her?
• Has the owner reviewed his or her estate planning documents in the past three years?
• Has the owner identified and written down his or her trusted advisors?
The more “no” answers, the greater the risk. How does your company look?
Estate planning is important for stating who receives your property and other assets when you die. But it’s also about minimizing potential taxes. As we discussed last month, spouses typically get their portion of an estate tax-free, but children, friends, or business partners do not. The so-called “death tax” comes in two forms: federal (estates valued at more than $5,250,000) and state (Oregon’s inheritance tax applies to estates valued at more than $1,000,000).
Although it may not be possible to avoid an estate tax, life insurance or other investment vehicles may provide a source of funding to avoid a potentially crippling blow.
Running a successful business is time-consuming, but failure to plan is planning to fail. Business owners should take steps to preserve the value of the company for the next generation.
by Intuitive Digital | Aug 1, 2013 | Advice
Last month we discussed six common mistakes that business owners make and their potentially devastating consequences for those companies. This month we’ll go a step further and let readers examine their own risk level for each of these mistakes. The first mistake involves not knowing what your business is worth.
Answer the following questions to see if your company is vulnerable:
• Has the business value been appraised by an outside expert?
• If so, has the appraisal been reviewed within the past three years?
• Is there a written buy-sell agreement?
• Is the buy-sell agreement funded through insurance or adequate cash reserves?
• Does the buy-sell agreement protect the business owner’s family and co-owners?
• Has the buy-sell agreement been reviewed within the past three years?
• Is the signed buy-sell agreement readily locatable?
The more “no” answers, the greater the risk. How does your company look?
If you don’t have a buy-sell agreement, you’re not prepared to deal with an owner who wants (or needs) to sell his or her stake in the business. A buy-sell agreement sets the ground rules for how that ownership stake can be sold or transferred and specifies how it will be valued.
Most companies with buy-sell agreements choose life insurance as a cost-effective funding mechanism to deal with the unexpected death of an owner, but insurance won’t help when an owner retires or simply wants to sell and move on. Although companies rarely fund 100 percent of future obligations in advance, it may be wise to consider setting aside money each year to help offset the financial burden of cashing out an owner at retirement. Either way, it’s critical to know the true market value of the company to ensure that enough funds are available to buy out an owner’s share of the company, especially if the buyout comes at an unexpected or inconvenient time.
Business Killers is an innovative educational program for executives and business owners put on by my friends Mark Baker and Lisa Brumm of AXA Advisors. For more information, contact Mark at mark.baker@axa-advisors.com or Lisa at lisa.brumm@axa-advisors.com
