The term “business continuation” is often used to describe succession planning. We find, however, that what the closely-held business owner really wants to know is, “How can I leave my business in style?”
The answer to this question is more than the identification of a successor owner or creation and funding of an agreement. It involves business, personal, and family issues–both financial and psychological. When the life underwriter orchestrates a process to help the owner answer his or her fundamental question, both the owner and the life underwriter benefit.
The owner/client receives the guidance necessary to develop and execute an exit plan. The life underwriter becomes a key player on the owner’s planning team, establishes a deeper relationship with the owner, and is positioned to reap greater financial rewards.
Consider the “typical” successful business owners situation. As the business (and its owner) matures, the owner reaches a point at which he or she would like to slow down, but thoughts of leaving the business speed up. Even the most thoughtful and successful owner is at a complete loss when it comes to planning his or her exit.
At a minimum, the owner needs to determine: 1) how much money is needed from the sale of this company; 2) when he or she wishes to leave; and 3) to whom does the owner want to transfer the company.
These and many other questions–all unanswered–serve to frustrate and stall the owner’s efforts to move forward. Family issues can be particularly vexing. In focus groups held by the Principal Financial Group, we observed family business owners delaying succession planning because they feared angering children when deciding who gets what. These parents are classic examples of owners who build successful businesses, but arent sure how to leave them.
We suggest that life underwriters use a methodical seven-step exit planning process, proven to be effective with thousands of business owners, to help their clients.
Each step of the exit planning process can be framed as a question. As the owner works toward an affirmative answer to each question–with the close involvement and guidance of advisors–he or she creates a workable, customized exit plan.
1. Do you know your exact retirement goals and what it will take–in cash–to reach them?
2. Do you know how much your business is worth today, in cash? Beyond what you provide the banker or the IRS, do you really know the economic value of your business?
3. Do you know the best way to maximize the income stream generated by your ownership interest and do you know how to increase the value of your interest?
4. Do you know the best way to sell your business to a third party that will maximize your cash and minimize your tax liability?
5. Do you know how to transfer your business to family members, co-owners, or employees while paying the least possible taxes and enjoying maximum financial security?
6. Do you have a continuity plan for your business if the unexpected happens to you?
7. Do you have a plan to secure financial independence for your family if the unexpected happens to you?
Answering these questions affirmatively requires thought and action on the part of both advisor and business owner. Lets use question five as an example of the need to think outside the business continuation box.
The successful transfer of a company to a child, key employee or co-owner depends on four elements:
–The ability and dedication of the prospective new owners;
–A company with strong, consistent cash flow and little debt;