Derek was ready to sell his midsize manufacturing business and begin retirement. He’d spent several years preparing for sale — reducing debt, selling off old equipment and ensuring the company’s senior managers could run the business successfully under new ownership.
But when his M&A advisor started asking about Derek’s retirement and estate plans — both of which are affected by a business sale — he realized he still had work to do. Part of preparing to sell your company is making arrangements for a reliable retirement income stream and planning how you’ll pass your wealth on to your heirs.
The planning process begins with a good succession plan. This outlines how your business is to be sold or transferred — whether to family members, your management team or an outside party.
If you want your children to succeed you, think about transferring partial ownership to them while you’re still the boss. Then, when you’re ready to relinquish control and turn your long years of hard work into a steady source of income, the transition is more likely to be smooth.
Business owners have many special considerations that require the expertise of financial and legal professionals. At a minimum, you should consult an investment advisor, attorney and tax expert.
One of the first things an investment advisor will help you do is ensure your assets are diversified. A high concentration in any one asset — for example, shares in your business — can make for a precarious financial situation. If that large asset were to decline in value, your retirement income and security could be compromised.
Another major component of retirement planning is determining your income stream — or where your income will come from and in what order you should tap your assets. In addition to Social Security benefits, you’re likely to have retirement accounts such as an IRA, SEP, Keogh or 401(k). When tapping accounts for retirement income, avoid actions that could have negative tax consequences. In most situations, you must begin taking minimum distributions from tax-deferred retirement accounts at age 70½ or face significant penalties. But depending on your cash needs and tax situation, you may want to take larger distributions or start taking them earlier.
How much income you’ll require depends on many factors, including your lifestyle and health. Some business owners stay on as paid consultants to their former companies or even as salaried employees. If you work at least part time after your official retirement, you may be able to put off tapping your investments and have the opportunity to continue to contribute to tax-advantaged retirement plans.
Your first estate planning objective should be to write a will — if you don’t have one already — and to appoint an executor or personal representative to oversee the distribution of assets following your death. You may also want to consider establishing a trust, an excellent way to transfer wealth to future generations and help avoid the costs and inconvenience of probate.
Trusts are legal agreements in which a trustee, usually a professional advisor or financial institution, manages property for the benefit of beneficiaries. These legal forms are varied and flexible. Trusts can be designed to achieve a variety of goals, such as to protect assets from creditors, provide professional investment management services or save taxes.
You’ll likely discuss tax-reduction strategies with your investment and estate planning advisors. But you may also want to talk over your business sale and postsale plans with a tax specialist.
Of course, your advisor will also help ensure that your sale transaction is structured to your greatest advantage. As Derek’s advisor explained to him, a stock sale — as opposed to an asset sale — generally minimizes a selling owner’s current tax exposure.