It’s Time To Start Thinking About An Exit Strategy
You’ve navigated a competitive market, steered your company to profitability, and put it on track for healthy growth and expansion. It’s now time to start thinking about an exit strategy.
Sound premature? It’s not. Proper planning can help ensure both a successful business transition and an equally successful retirement for the owner. Too often, owners get caught up in day-to-day operations and forget to think long-term. Some figure they’ll simply turn the business over to the kids. Others plan to sell when it’s time to retire and live on the proceeds.
But often the kids don’t want the business, and finding the right buyer may not be easy, particularly these days when capital is tight. Those who do find a buyer may end up agreeing to an installment sale, which means they’ll likely get the business back if the new owner goes broke. A boomerang sale is a headache if the business comes back when you’re young, but it can be a disaster if the sale is a critical part of your retirement.
That’s why owners who want to get full value from their business need to think ahead. Succession planning should start as soon as an owner is able to move beyond tactical day-to-day operations to think strategically about the business and his or her own role in the company’s future.
The Barry Middleman Story
Consider Barry Middleman, now 71, who founded his architectural firm back in 1973. He was still in his early 50s when he first began his succession planning. He started by crafting a new identity for his business. In 1994, the firm shed the name Middleman, De La Garza & Neugebauer and became MDN Architects.
“A personal identity drives down the value of a company,” Middleman explains. “It is not as marketable.”
At about the same time, MDN began working to seriously diversify its client base, once again increasing the company’s value. Then two years ago, a new partner came on board, dramatically lowering the average age of the partners. Now Middleman is planning to gradually step back from the business, staying involved in those areas that interest him most. Eventually, he says, he’ll retire, leaving the new partner at the helm.
Yet, even careful succession planning can be bumpy, as Middleman learned when the recession hit in 2008. That’s why owners can’t afford to put all of their assets into their business. Money tucked away in a 401(k), IRA or other retirement plan can act as a shock absorber, cushioning owners from any economic potholes they encounter on the way to the exit door.
For young companies, the best retirement savings vehicle might be a SIMPLE IRA, which lets both owners and employees contribute and at higher levels than those allowed with a traditional IRA. As companies grow, 401(k) plans can be a good next step, and Roth 401(k)s—which are funded with after-tax dollars—provide distributions that may be tax free.
Permanent life insurance offers another way for owners to diversify their holdings while creating a potential safety net for both their company and their retirement. Business owners, for example, may be able to borrow on the accumulated cash value in these policies to help meet expenses or payroll during lean times. And if the policies have cash value when the owner is ready to retire, it can be a good source of supplemental retirement income.*
Ultimately, succession planning is about more than simply finding the exit door. It’s also good business. While there are no guarantees, planning that focuses on such things as increasing the company’s value can help keep a business on track while it’s still growing. And that’s a good way to make sure you won’t be leaving your retirement to chance.
*Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. SMG Advisors, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.