Plan now for a successful transition
Editor’s note: This is part five of a six-part series on the great reevaluation business owners and executives are experiencing this year.
A substantial amount of family wealth comes from business ownership. Before the pandemic, the median net worth of self-employed families was four times greater than families of workers. That’s a substantial amount, with significant generational impact.
And a lot of pressure on business owners.
Ongoing, pandemic-related pressures have left many business owners exhausted. Less than half of business owners have taken a vacation in the past year, and 62 percent say they are working longer hours, according to a Capital One Business survey. Many owners are deciding that’s no way to live.
So, what are the alternatives?
Owners who plan for a business transition early have more options.
Transition planning research
Before you can decide whether to hang on or bail out, you must do some research. Gather a team of professional advisors, such as a certified financial planner and tax CPA, to help you answer these questions:
1. What are your personal circumstances?
Assess the personal value you experience from being a business owner. What does the work mean to you? Maybe you enjoy the community ties and prestige or view your business as part of your identity. If the business is just a means to an end (for you or your family), then there may be other ways to fulfill that need.
If you feel tethered to the business to keep it going, then transition planning can help you identify ways to step away from the work. Doing so can help you regain joy in the work and increase the value of your business.
2. What are your financial needs?
If you’re counting on the business (or its transition) to fund your retirement, a certain lifestyle or charitable legacy, then do the math.
Try to understand your future financial needs and sources of income, including potential tax implications from different transition arrangements. Keep in mind, you may need multiple savings vehicles (or an insurance policy or trust) to supplement your family’s income after the business is transitioned or dissolved. Advisors can help you determine how much money you need and develop tax-advantaged strategies to secure your income.
3. What is the business worth?
A valuation consultant can determine an objective, current market value of your business. Even if you’re not ready to sell or transition the business right away, a valuation can serve as an important “health check.” The process often uncovers opportunities to increase revenue, decrease costs or reduce risk.
You may find there’s a gap between what you need, what you think the business is worth, and the market value. This is normal – and it gives you a list of strategic priorities to address.
4. What is an ideal transition?
Are you hoping to work for your entire life? Or keep the business, but scale back hours and daily demands? Do you imagine passing the business on to your children and grandchildren?
It’s your business, so you call the shots. Decide how you’d like to transition the business and then build a plan to match. If you want to sell the business to a third party, then focus on increasing transferable value. If you prefer an internal transfer, then start developing talent – and make sure your potential successors are on board.
Once you understand your transition intentions, embedded them into strategic plans for the business. Make sure your intentions are clearly included in personal estate plans too, in case the transition is enacted because of death or another incapacity.
Harmonize business and financial goals
If a business transition is intended to fund retirement or another ambition, then the sale should be structured to match. Make sure you understand all of your transition options and the personal financial impact of each route (e.g. lump sum payments, installment sale, retaining stock).
Take time to evaluate different personal and business scenarios. A financial planner can help you determine whether the income from a transition will meet your personal financial goals (along with other sources of income). A professional tax advisor can also identify tax exposure (like state sourcing rules or estate tax), along with different strategies to mitigate your liability.
Often, owners delay transition discussions until they near retirement. By then, it could be too late – especially if ownership changes suddenly due to a death or illness. If transition plans are unclear, it could affect business operations and degrade the company’s value.
It’s never too early to start a transition plan.
How we can help
Financial conversations are difficult but necessary. The results could affect future generations.
That’s why it helps to work with a partner for your entire financial life. Our advisors can bridge the gaps between your financial, business and personal priorities. Find out how on our private client services web page and see other parts of our series on our Great Reevaluation series web page.
About our series
Have you been thinking changing your life? You are not alone. Millions of other Americans are also weighing whether or not to change their future in what has been called “the great reevaluation.” From careers to finances and to families, our team provides guidance to help you make that decision. Learn more on and see other parts of our series on our Great Reevaluation series web page.