With 80% of a business owner’s personal wealth tied up in the business1, business owners often focus on maximizing and protecting business-derived assets so that at the right time, they can reap the rewards of years of hard work. Planning with a financial advisor in advance of a transition can help owners address key issues and maximize the value they get out of their business.
Start transition planning early
According to SunTrust Research, 16% of business executives are actively planning to sell or merge a business with another firm. Another 12% are considering a transition involving a strategic sale. The sooner a business owner starts succession planning, the better. Craig Cascio, CFP©, Senior Vice President and Wealth and Estate Planning Strategist at SunTrust advises, “The best transitions occur when business owners think many years ahead – three years at a minimum - and have a vision of where they want to go to get the highest possible value from their business.” This includes an early conversation with a financial advisor focused on personal investments and a relationship manager for the business so they can better understand the owner’s ultimate goals and anticipated outcomes. “There are no right answers, but by having the conversation early clients can better understand their options and how SunTrust can help,” says Cascio.
Whether a business owner is years from transition or is looking to sell soon, Cascio advises placing a priority on putting protections in place to safeguard business assets and protect family interests.
Planning for the unexpected
Guarding business assets means planning scenarios that include an unexpected owner death. Estate taxes can be heavy and will need to be paid soon after the owner's death - typically within a year. If surviving family members don’t have the liquidity to make that payment, they may have to sell the business or leverage it to raise cash. Besides adding stress to the situation, these forced actions can even lose value for the business with a rushed sale. With careful planning, provision can be made for supporting surviving family members in handling unexpected business costs related to the owner's death.
“One of the biggest mistakes I’ve seen is that a business owner hadn’t planned for the possibility of having to pay estate taxes,” says Cascio. “Family members did not have funds to pay the estate taxes when the owner died unexpectedly, and whether they had planned to take over the business or whether they had eventually planned to sell it, they suddenly had to have a fire sale so they could make the tax payment.” A financial advisor and business relationship manager can advise owners on ways they can make sure their heirs have liquidity in case of their unexpected death.
Have contingency agreements with your partners
If an owner is part of a partnership, it’s critical to have a buy-sell agreement in place that spells out what happens if one of the partners dies, is disabled, divorces or retires. Any of those events can have repercussions in the business and leave an owner working with a partner’s surviving family member. Once one of those events has occurred, it becomes much more difficult to negotiate differences. Having a buy-sell agreement provides necessary structure to manage through stressful issues. “I recommend you address partnership issues as early as possible so you can decide ahead of time who you are going to be in business with,” advises Cascio.
Manage cash accumulation
Storing excess cash in a business can expose those funds to unnecessary business risk. Particularly for pass-through tax entities, leaving cash from earnings that have been taxed and paid at the individual level could serve as a target for legal action from trade partners, other owners, or aggressive plaintiff’s attorneys. “Overcapitalizing a business beyond growth, seasonality and contingency needs is not a prudent capital strategy. Distribute what is needed to pay taxes, and draw cash amounts down,” says Cascio. “Use a credit line or other debt for funding growth and working capital variability.”
Determine future ownership early
Strong transition plans take time to construct and put in place. Starting with a Six Year Plan, owners can define a longer-term vision to guide business and transition plans. Direction from this planning points to other considerations that need to be addressed depending on whether the owner passes the business onto a family member, sells to current employees, or sells to an outside buyer. Early planning addressing both business and personal wealth contingencies prepares for a smoother transition.
Mediate risk through portfolio diversification
With so much personal wealth tied up in the business, it is extremely important for business owners to build assets outside the business to mitigate risk. “Diversification is particularly important to business owners whose long-term wealth often derives from a single business and whose income comes from the same place,” says Cascio. Moderating the risk of financial surprises through investment diversification helps ensure owners and their families will be financially secure throughout retirement.
Building a portfolio of marketable securities to support retirement requires planning and discipline. By working with your SunTrust Relationship Manager and financial advisor using the SunTrust OneTeam ApproachSM, your team can develop a financial plan to diversify your current holdings. Your team can also project your needs as an owner after a sale of your business, including any personal lending and credit needs, and develop a retirement plan well in advance of a sale to ensure that the expected proceeds will support your lifestyle in retirement.