Business owners often bank on their company as a source of retirement income. But many of them fail to plan for leaving someday, whether it’s through retirement, illness or death.
To help, Hubbard Financial Planners coordinated a workshop, “Business Owners Summit – Avoid Business Killers,” on April 2 at which four financial representatives provided ways to avoid that mistake.
It’s easy to brush off the exit plan when there is a pile of urgent matters to resolve and a sense that there’s always time to take care of it later, the experts said.
But postponing succession planning is one of the most common mistakes that cause businesses to fail, they said.
Without adequate planning, a death, illness or unexpected retirement can trigger a management crisis, family strife and a distress sale at a fraction of the company’s potential value.
To prove their point, the experts played several video vignettes of examples of widows and children fighting over who was most qualified to run the business; widows threatening to sue business partners to get their “fair share” of the company; and companies being forced to sell to pay taxes.
“It’s a recipe for disaster,” said Bill O’Leary, a Jacksonville lawyer who practices legacy planning and led one of the sessions.
Statistically, disability disrupts business leadership more often than death, said Pat Hubbard, the president of Hubbard Financial Planners, who coordinated the workshop.
“Nobody plans this,” Hubbard said. “But folks, this happens every day.”
One if the best succession plans might be to sell the company before retirement, said Cal Heseman, a senior business broker with Gateway Business Advisors.
“The best time to start planning is when you start the business,” Heseman said, noting that burnout is the No. 1 reason businesses are sold.
The sales process can take years and will require a formal valuation, a measure of the company’s financial performance compared to similar companies in its industry.
Until then, business owners can work with a “calculation of value,” a limited review of performance over the past three years. While not legally binding, it provides a good indication of profit and loss and a range of value, Hubbard said.
To prepare for the sale and attract buyers, owners must consider many factors, including:
• Identifying potential buyers and why they’re interested
• Considering market timing, competition and markets
• Having excellent financial records and clean balance sheets
• Reducing debt
• Building a strong management team
• Producing a diversified base of customers and suppliers
• Showing steady financial growth with recurring and predictable revenue
To prepare for exit and succession planning, the experts suggest that an owner:
• Consider his or her goals and when he or she would like to become independent
• Draw up a buy-sell agreement that identifies a qualified person to run the business
• Share that agreement with key employees, spouses and other family members who will be affected
• Fund the exit with methods such as life insurance, stock options or deferral plans
• Protect the company’s value by incentivizing key employees with benefits, such as deferred compensation, to keep them from leaving
• Diversify retirement income: Company assets should account for less than 25%
• Work with a financial representative to reduce tax liabilities through tax bracket management and investments like trusts and life insurance.
The event was at the Northeast Florida Builders Association auditorium.
