Laying the Groundwork for Your Future
Kirk Lombard and Daniel Koblin
For more information, please contact Daniel Koblin at daniel.koblin@LFG.COM
Many small-business owners are so busy running their companies, that they rarely give much thought to the day when they’ll move on to something else— be it retirement or another venture. But a long-term capital strategy can lay the groundwork for that eventuality. It lets you draw equity from your company to diversify assets and meet future needs, while transferring and maintaining the financial strength of the business.
Drawing on Equity
To prepare for the future, business owners may draw equity from their companies to help meet long-term asset diversification and financial needs. Quite frequently, owners may have 80 to 90 percent of their personal wealth locked inside the equity of a closely held company. Thus, they might be rich on paper, but they may still feel cash poor. If it’s a mature company, they can tap into that equity and also have an exit strategy for whenever that time comes.
The challenge in drawing equity from a company is maintaining its financial vitality, so that the business can continue to grow and finance retirement and incentive plans for owners and key employees. These programs are often as much a factor in a company’s value as its profitability. To build value, small business owners can develop “golden handcuffs,” such as non-qualified, deferred-compensation plans to creatively reward select employees. For example, they might provide longevity bonuses of up to US$75,000 a year—post-retirement—to key employees who stay on to the age of 65. Unlike a retirement plan, owners can pick and choose who will be covered by these more lucrative plans.
When considering long-term capital needs, business owners may want to:
- Take inventory of personal assets and liabilities, income sources and expenses
- Get a formal business valuation to know what your business is worth
- Draw up a succession plan. Ask yourself if you want to transfer your business to partners, family members, employees or to outside parties
- Plan a target date to leave your business. For example, will it be three, five or 10 years down the road?
Oftentimes, small-business owners don’t have comprehensive exit strategies for transferring ownership, or they have outdated plans that fail to address tax law changes. This tends to occur because they typically reach out to their business advisors only when there’s a crisis or deadline. To help make a smooth exit, business owners should have their advisor develop a buy-sell agreement, which is especially important when there are multiple owners. These agreements outline detailed succession plans should a business owner retire, become disabled, die or get divorced.
Everyone will exit their business eventually, voluntarily or otherwise. The question is: Are you going to do it on your own terms, or is it going to happen as a result of some catastrophic event? Exiting a business is often the biggest event in an entrepreneur’s life. You will want to get it right, because you only have one shot at it. And if you do it right, you’ll be able to reap the benefits of your life’s work and retire in style.