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6 Key Steps to Plan for Your Business’s Future

Matt Zolton, JD, CFP®

Director of Financial Education

Last Updated
October 19, 2021
Group of coworkers discussing work in casual setting

Building a business is hard work.

From the initial planning stages to day-to-day management, there’s never a shortage of things for business owners to do, and it’s no wonder that planning for your business’s future may not be high on your list.

But from a financial planning perspective, your business may be one of the largest and most important assets you have. To help prepare for the future, here’s a six-step process for business owners to follow:

Step 1: Determine Your End Game.

As Dr. Laurence J. Peter, the man who established the famous “Peter Principle” said, “If you don’t know where you’re going, you will probably end up somewhere else.” If you want to avoid ending up “somewhere else,” you must establish goals for yourself, your family, and your business.

Consider what motivates you – examples could include income, wealth, identity, challenge, stimulation, or satisfaction. Once you’ve thought about what truly motivates you, it will be easier for you to clarify your priorities and express your goals. Once you have a clear vision, it’s easy to avoid the trap of quick fixes and instead focus your energy on the most urgent concerns. Bottom line: You will move forward.

Some common goals among business owners are:

  • Enhancing the value of the business.
  • Preserving the value of the business.
  • Exchanging the value of the business for money with the least amount of taxes.
  • Meeting personal and family needs by providing security and continuity of the business in case of the owner’s premature departure.
  • Leaving a legacy.
  • Giving money to charity.
  • Shifting wealth to younger generations.
  • Rewarding key employees.
  • Keeping the business (or selling the business) at the owner’s death.
  • Taking the business to the next level—whatever that may be.

Step 2: Confirm What Your Business is Worth.

Most owners have no idea what their business is worth, but knowing its value can be helpful in achieving many goals, especially if a sale is a potential goal. In the meantime, knowing what your business is worth will help in projecting cash flow, estate and gift tax planning, knowing how much insurance to purchase for buy/sell agreements, compensation planning, knowing available collateral for financing, and retirement planning. It’s a good idea to discuss business valuation needs with your estate planner, business advisors, and tax professionals.

Step 3: Be Specific about Your Vision for the Business in Case of Incapacity, Death or Retirement.

Your overall planning objective for what will happen when you retire, become incapacitated, die, or sell the business often assumes that the business will continue despite such an event. You may want the business to survive with whomever you choose receiving the value of your ownership interest.

Likewise, if your business has multiple owners and you “depart,” for whatever reason, the remaining owner(s) usually will want to retain ownership and control and may not want to be in business with your creditors, surviving spouse and/or heirs.

Step 4: Plan for Personal Wealth Preservation and Succession of Your Business.

Most people, regardless of whether they own a business, want to preserve their wealth and minimize taxes. When a business is involved, this requires integrating lifetime succession and business objectives with the estate plan of the owner. Estate planning thus becomes part of business planning. When developing an estate planning strategy, there are several things to consider:

  • The growth of non-business assets.
  • How to be “fair” to children both inside and outside of the business.
  • Minimizing estate taxes and ensuring sufficient cash for payment.
  • Asset protection during your life and for your heirs.
  • Probate avoidance.
  • Planning for long-term health care costs.

Step 5: Grow and Protect Your Business’s Value.

For most owners, growing the business and protecting its value will have many benefits, such as creating the ability to sell the business, maximizing the amount realized on the sale of business, protecting assets from potential business and personal creditors, and helping to keep key employees and family members in the business.

Protecting the business’s value generally involves one or more of the following actions:

  • Increasing cash flow.
  • Developing operating systems (so that the system, not your personal involvement, becomes the solution and method that sustains business operations).
  • Documenting sustainability of earnings (if you are taking all the cash out of the business, it will be harder to sell).
  • Improving company performance as measured by industry metrics.
  • Paying down debt.

To grow the business and protect its value, it may be necessary to restructure the organization, solidify and diversify the customer base, implement strategies to grow the company, develop and protect proprietary technology, build a solid management team, and groom a successor.

Step 6: Map Out How the Business Will Be Transferred.

Your business’ sale and value are both affected by intrinsic factors (e.g. how the business has grown); extrinsic factors (e.g., the local and general state of the economy); and the effectiveness of the sale process. You need to be aware of each of these and have a strategy to maximize the value of your business in the event you have an unfavorable factor working against you.

When looking to make a transfer of the business, there are two types of transfers to consider: to those who are in the business (whether it be a child or key employee) and to outsiders (third party sale). Each has special characteristics.

Sale to Children or Key Employees

Your main goal may be to sell the business to your children and/or key employees. This can be a great way to motivate and help retain key employees and family involvement in the business. To fund this type of sale, the money usually has to come from the ongoing business, so planning is critical to help reduce the risk of a buyer default and to increase the amount of money you will receive.

In some cases, you may decide that you wish to gift part or all of the business to your children instead of selling it to them. This can be helpful if you need to remove assets from your estate, if your children do not have the cash flow to purchase the business from you, or when your overall estate planning goals are best met by a gift of the business.

Sale to Outside Buyer (Third Parties)

There are several benefits to selling your business to an outside buyer, such as: receiving cash at closing, not having to finance the sale yourself, no family succession issues, and an increased speed with which you can exit the business. However, this option is not without its difficulties.

Everything must come together just right to successfully complete the sale of a small business. Without proper planning, it can be very difficult to find a buyer who is willing to pay your desired price. A third party is purchasing your business to make money and most likely will not have the same emotional attachment that you, your children, or your employees have to the business. The numbers are going to be what matters to them.

Let Us Help You Plan for Your Business’s Future

Depending on the health of your business, as well as your personal goals, it can take several years of planning and action to implement a business succession plan and get the other planning pieces in place. At Creative Planning, we offer a range of business-focused services to support plan sponsors of corporate retirement plans and business owners who want to plan for the eventual sale of their company. We work together to help ensure all aspects of your business and personal finances are well cared for. If you’re ready to organize your entire financial picture, please request a meeting today.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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