|
|
|
|
|
|
|
|
|
|
There comes a time when every business owner needs to start thinking about what happens when he or she is no longer running the business. Many people wait longer than they should to start thinking about the future, and that sometimes results in an unforeseen outcome. |
|
| Good planning, started early, is the key to a successful transition of your business. Here are some tools to get started. You may also want to contact a financial or legal professional to help you understand your options and identify the best course of action.
|
|
Getting started!
1. Key questions about transitioning your business.
2. Documentation you may need.
3. Succession planning tips.
|
|
|
|
| For more help with Business Planning, contact Private Client Group
|
|
|
|
1. Key questions about transitioning your business.
- When do you want to transition out of your business?
Some people want to keep working for as long as they are able. Others look forward to a time when they can step away from their business to pursue other interests. In either case, you want to have a plan for your business when you are no longer there to make the decisions. The earlier you get started on this plan, the better - even if you expect to continue working for decades.
- Do you want to keep the business within the family or sell it outright?
Many business owners have very limited liquidity, and may find it necessary at some time to sell their business in order to meet their personal cash flow needs. Many owners want to see their company continue in the hands of other family members or loyal employees. Good planning can help accomplish this.
- If you plan to sell your closely-held company, what is your strategy for maximizing shareholder value? How would you position the company to sell it in 3 - 5 years?
Whether you want to sell your company to free up resources for a new endeavor or fund a comfortable retirement lifestyle, you'll want to begin now to help maximize the value of your holdings. A comprehensive transition plan will help you meet your future cash flow needs, minimize the tax impact of your company's sale, and identify how to invest your assets to meet short- and long-term needs.1
- If you plan to keep the company "in the family," who will take over after you?
º Your spouse
º A child or children
º Your business partner
º Key employees
º Unknown
Do they have the interest, skills, energy and passion to succeed in the business?
The question of which person or persons should assume responsibility for the company is one of the most sensitive issues facing owners of closely held companies. Some family members may wish or expect to be actively involved in the company, while others would prefer to be "cashed out." An important part of business succession planning (and Estate Planning) is finding a means of providing fair value to family members while meeting your objectives for the business.
- How do you plan to finance your retirement?
Several options exist for business owners to fund retirement for themselves or their spouse. These may include:
º An income stream from your company's ongoing operation
º Buyout of your company ownership
º A deferred compensation plan (SEP or 401K)
Each of these options requires good Retirement Planning, often well in advance of when you intend to retire.
|
|
| For more help with Business Planning, contact the Private Client Group
|
|
| Back to Top |
|
|
|
2. Documentation you may need.1
To ensure that your business succession plan is carried out according to your wishes, be sure you have the necessary documents and plans in place. These may include:
- A current will
- A revocable trust - This is a good way to protect your estate from going through the public process of probate, especially if you are in a competitive industry where you would not want your company's assets to be publicly known.
- Business valuation report - Getting an objective, professional assessment of what your business is actually worth will help you make appropriate decisions about succession planning.
- Buy-Sell agreement - This can provide liquidity for you or your family, and may be funded with a life insurance policy.
- Cross-Purchase agreement - This is another tool to provide liquidity, allowing stockholders (family members or others) to purchase the share of a withdrawing or deceased stockholder.
- Estate and tax plan - Formulating a personal financial plan in conjunction with your business transition can provide opportunities to maximize the benefits of specific strategies for yourself and others. A good plan will preserve your assets for the benefit of your family, minimize the tax burden on your estate and create liquidity to meet your business succession objectives. It can also provide for Charitable Giving either during your lifetime or after your death.
- Retirement plans - Use your 401(k), SEP or Keogh plan to pay yourself first in a tax-efficient manner.
- Employee Stock Ownership Plan (ESOP) - If your desire is to sell your business to your employees, you will want to put an ESOP in place as soon as possible.
|
|
| For more help with Business Planning, contact the Private Client Group
|
|
| Back to Top |
|
|
|
3. Succession planning tips1
- Start planning early. Transitions take time.
- Define your objectives. When planning your exit from your business, here are some things you may want to accomplish:
º Meet personal cash flow needs
º Fund a lifestyle that maximizes your personal freedom
º Minimize income and estate taxes1
º Create a structure for your children to assume
responsibility for the business
º Be fair in providing something of value to each child,
although not all may wish to participate in the business
º Make charitable gifts that may also provide tax benefits1
º Create an opportunity for employees to take over the
company
- Identify and groom your ideal replacement. Only you have your vision for the future of the business in which you've invested your life's work.
- Identify what talents and skill sets will be needed to continue to lead the business and either acquire people with those skills or actively develop them in the individuals you want to have assume responsibility for your company.
- If you are planning to sell your business, evaluate your financial statements. Be sure a potential purchaser can easily identify discretionary and non-recurring expenses that you may have incurred to minimize taxation. You want a buyer to have a clear picture of the company's true profitability.
- Eliminate or reduce activities, expenses and personnel that exist for your individual purposes and will not be part of future ongoing expenses.
- Seek professional help in determining a fair value for your company and objectively evaluating potential buyers or successors. The right buyer who understands your business will discern its premium value.
- Control your emotions. This once-in-a-lifetime process is very personal and emotional. Seek objective advice.
|
|
| For more help with Business Planning, contact the Private Client Group
|
|
| Back to Top |
|
|
|
Business Succession Glossary1
- Buy-Sell agreement — A legal contract to provide for the smooth succession of your business upon the occurrence of a specified event. The agreement spells out the terms under which a designated co-owner, employee, heir and/or other party will buy your interest in the business if you die, retire or become disabled. The intent is to help ensure that the business continues and, most of all, that your beneficiaries receive the fair market price, in full, for your interest in the business.
- Cross-Purchase agreement — Under a cross-purchase agreement, the stockholders agree to purchase the shares of a withdrawing or deceased stockholder. To fund the purchase, each stockholder owns and is beneficiary of a policy on the life of every other stockholder.
- Redemption — Under a stock redemption plan, the corporation agrees to redeem the shares of a stockholder at his or her retirement, death or, perhaps, disability. The redeemed shares become treasury stock. To fund the redemption, the corporation owns and is beneficiary of a life insurance policy insuring each stockholder.
- Employee Stock Ownership Plan (ESOP) — An employee stock ownership plan (ESOP) is a type of defined contribution benefit plan that buys and holds company stock. ESOPs are often used in closely held companies to buy part or all of the shares of existing owners, but they also are used in public companies. Related to ESOPs are Section 401(k) plans, which may be used alone or in conjunction with ESOPs to hold company stock.
- Revocable trust — A revocable trust is a flexible arrangement you can change or dissolve at any time. You can name yourself trustee (or co-trustee) and retain control over the trust, its terms and assets. As a trustee of your revocable trust, you may continue to manage assets contained in the trust during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death. A funded revocable trust may be used to avoid probate.
- SEP-IRA — A SEP-IRA, or Simplified Employee Pension IRA, is a simplified tax-deferred retirement plan provided by sole proprietors or small businesses, most of which do not have any other retirement plan. With the exception of the higher contribution limits, they are generally subject to the same rules as a regular IRA. In a SEP-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.
- Keogh — A Keogh plan is a tax-deferred retirement plan designed to help self-employed workers or individuals who earn self-employed income establish a retirement savings program. Although typically adopted by self-employed individuals, corporations can also establish and maintain this type of retirement plan. The Keogh plan rules are more complex than SEP and SIMPLE plan rules.
- 401(k) — A section 401(k) plan is a type of retirement plan in which an employee can elect to defer a portion of his or her wages to the plan on a pre-tax basis. These deferred wages are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. The funds grow tax deferred until you begin to make withdrawals. Funds distributed to you are taxed at your income tax rate at the time of distribution.
|
| NOT A DEPOSIT |
NOT FDIC INSURED |
MAY LOSE VALUE |
NOT BANK GUARANTEED |
| NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY |
|
This information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Investors should consult their investment professional for advice and information concerning their particular financial situation.
1 This discussion is intended to be informational only and is not exhaustive or conclusive. U.S. Bank and its representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
|
|
| Back to Top |
|
|
|
