When thinking about business succession planning, most business owners start by considering how much their business is worth, how to transition the business, and to whom the business should be transferred. The focus is on the mechanical transition, which could be a gift or sale to family members, a sale to management, or a sale to a third party. Although it may seem strange, when thinking about transitioning your business, you should begin at the end, by planning for your and your family’s life after the transition and how leaving your business will impact your family’s financial success.
Profound Regret
It’s common for business owners to feel regret after selling a business. There are many different contributors to feelings of regret including lack of purpose, loss of status, or simply boredom. Sometimes regret comes from the lack of personal financial planning before the transition and the former owner receiving less from the transaction than is necessary to maintain a desired lifestyle.
Given the amount of a business owner’s wealth that is tied up in the business, failure to consider the financial resources needed to support the owner’s family’s desired lifestyle in retirement, is a serious oversight
“When you’ve spent a career building a business, you want that effort to sustain you and your family’s lifestyle into retirement,” said Jim Benedict, Co Head of Business Owner Solutions at PNC Private Bank Hawthorn. “Selling a business is not a time when you want surprises.”
Know What You Need to Live Your Life
Before making any major change, including a significant financial decision like selling a business, it is important to evaluate its impact on your life. Envision your life after leaving your business. Think through what you enjoy doing in your spare time. What activities do you wish you had more time to pursue? What causes are you passionate about? What does it cost to do those things?
Managing a business requires a lot of time and energy. Being an owner offers the opportunity to influence the financial direction of how the business operates — its operations, risk profile, credit capacity and use of capital. While you are running the business, it likely feels easier to project cash flow year to year and subsequently plan your life based on that anticipated income. You may also have access to luxuries like travel, transportation, technology and other niceties that are provided by the business. So it is important to consider, when contemplating the future sale of your business, which of those luxuries you wish to keep and how to budget to pay for them.
The only way to know how the sale of your business will impact your family’s lifestyle is to prepare a comprehensive financial analysis that illustrates the cost of your lifestyle today and the sources of revenue used to fund it, and the impact of various transition options on your financial picture.
Engaging in comprehensive financial planning well in advance of an ownership transition could help you rethink your business working capital strategy, and potentially relocate some business assets (such as profits) from the company’s balance sheet to your personal balance sheet over time. Having assets on your personal balance sheet can provide you with flexibility when the time comes to negotiate the selling price or terms of your exit from the business.
A comprehensive financial plan can project the financial impacts of life’s beautiful things like vacations, a vacation property, or a long life with family. It can also help project the financial impact of life’s difficulties, such as long-term care needs, children who need financial support deep into adulthood, or premature death. We can’t know what the future holds, but understanding the potential financial impact of life’s ups and downs can help you be better prepared.
“Thinking about what you want your life in retirement to look like can guide the decisions you make about your business today,” said Max Barger, Co Head of Business Owner Solutions at PNC Private Bank Hawthorn. “There’s no substitute for planning, and it’s never too early to start.”
Plane Now, And Keep Planning
Because each family’s financial goals and objectives are different, so too will be the financial plan needed to achieve them. Though individual plans will be unique, the importance of budgeting time to establish one is universal. Consider incorporating financial planning that explores the financial impact of exiting the business and the resources needed to help your family reach their financial goals in your retirement into your regular business planning.
Setting a financial plan in place before an ownership transition is a critical step for preventing any surprises during or after the sale phase of the business. For many, lack of planning can lead to a business sale with insufficient financial gain after tax, or the postponement of retirement in order to build business value or personal financial resources in order to reach financial security. Good business planning begins early and never ends; and a very important part of business planning is planning for your exit from the business.
Knowing what you need today and projecting what you will need in the future, allows you to take steps to grow and develop your business now, prudently and patiently over time, so that, whatever your exit plan, the amount that you receive when you exit will support your desired lifestyle, now and in the future.
“Whether or not you’ve thought about how you transition your business, one thing is certain: your business will transition someday,” Benedict said. “Creating a plan, revisiting and adjusting it over time can ease some of the uncertainty as you move from your business to the next phase of life.”
If you are a business owner, whether you are thinking about transitioning your business, haven’t thought about it at all, or even if you don’t know where to start, one thing is certain: whether voluntarily or involuntarily, —every business will transition someday. By beginning at the end and continuously planning for your present and future financial goals and objectives, after you transition out of your business, you will be more likely to relish than regret your business succession decision.
