You’ve spent years building your business and your reputation. But have you taken the steps necessary to protect yourself, your family and your legacy?
Only one-third of small businesses survive more than 10 years. Let’s make sure your business is one of them.1
Whether you’re just launching a start-up or growing an established, family-run business, we’re here to help you ensure your business’s survival. Here’s how you can avoid five common business pitfalls.
1. The Business-Dependent Retirement Plan2
Are you pouring everything you have into your business and counting on it to provide for your future retirement? What happens if a recession hits, the market changes, or other factors decrease the value of that business? Will you be stuck working longer than you hoped?
Don’t rely solely on the worth of your business as your retirement plan.
Instead, you can easily set up a 401(k), IRA or SEP (Simplified Employee Pension) through your bank or brokerage firm. Even if cash is tight and your initial contribution is small, it pays to get into the habit of treating your retirement contribution as a regular, recurring business expense.
As your business matures and prospers, you may even want to consider taking more cash out of the business to fund investments. Just make sure to consult with a qualified investment planner to ensure your retirement plan and other investments are diversified, tax-savvy and capable of generating the income you need to sustain the lifestyle you want. You’ll also want to avoid over-investing in your own industry so you’re not hit hard by any industry-wide downturns.
Independent of the ups and downs of your individual business and your industry, your well-considered retirement plan can help ensure you can retire when you plan rather than when you can.
2. The Postponed Succession Plan3
In family-run businesses especially, it can be hard to discuss who’ll run the show once the current leader leaves – whether through retirement, death, disability or divorce. But those discussions won’t get any easier when emotions are high.
Don’t put off planning your business’s future to avoid conflict today.
Instead, go ahead and start the conversation now. Include family members, key employees and your legal and financial advisors. Those advisors can help you create a customized succession plan that takes into consideration how to:
- Equitably compensate the family members who weren’t chosen to lead the business
- Maintain some control while your successor “learns the ropes” through mechanisms such as revocable trusts, family limited partnerships and limited liability corporations
- Minimize estate and/or transfer taxes as well as the length of the probate process in the event of your death
- Fund an outright purchase of the business, either through a buy/sell agreement funded by life insurance proceeds or outside investors
3. The Outdated or Unfunded Buy/Sell Agreement
If you have business partners, do you also have a carefully thought-out buy/sell agreement? A buy/sell agreement is a legally binding contract that requires one party to buy, and another to sell all or part of a business in the event of death, disability, retirement or another mutually agreed upon circumstance.
Does yours include options for funding a future buyout or a schedule for keeping the business valuation up-to-date? If not, you and your partners could be stuck selling the business for far less than its value or be unable to finance a sale.
Ensure your buy/sell agreement is designed to meet future legal and financial obligations.
Your bank’s relationship manager can help you avoid common missteps. They can help you:
- Identify an attorney who specializes in buy/sell agreements for your industry
- Find the right appraisers to conduct the initial valuation and update future valuations
- Understand options such as the insured buy-sell agreement, where proceeds from an owner’s life insurance policy covers the buyout cost
Because it is a living document, the buy/sell agreement should be reviewed at least every three years.4
4. The Missing Business Continuation Plan5
Can your business survive if you or another key employee are out of action for a prolonged period of time? If the answer is no, you’re missing a business continuation plan.
Develop a customized business continuation plan to protect you in case of unexpected personnel absence or injury.
A business continuation plan is a document that combines written procedures with various types of insurance to ensure a business survives the loss of key personnel or the death or disability of its owner.
Customized to your business, the plan should include:
- A short-term management plan to guide daily operations in the event the owner/manager is unavailable
- Options for servicing any existing debts and financing payroll
- Key person insurance, a life insurance policy payable to the business in the event a person essential to your business’s survival dies
- Disability insurance to replace lost income and cover expenses in the event of illness or disability
- Incentives for retaining key staff such as stock options, education benefits and deferred compensation plans
- Succession directions in the event of death, disability or retirement
- Tax-advantaged options for transferring your business to a family member
5. The Tax-Disadvantaged Exit
Whether selling your business or transferring it to your children, you can get hit by unnecessary taxes if you don’t plan ahead.
Take a holistic, tax-savvy approach to every aspect of exiting or transitioning your business.
- Estate planning. Consider life insurance options that can help your heirs cover your projected estate taxes. An irrevocable Life Insurance Trust (ILIT), for example, can provide non-taxable benefits that can be loaned to the estate to cover taxes
- Investment planning. Work with your investment advisor to develop an asset allocation strategy that maximizes after-tax returns and minimizes over-concentration in one sector
- Business transition planning. Ask your tax advisor about ways to transfer ownership of your business to your business successor while minimizing transfer or gift taxes
Get started early and don’t do it alone.
You’re an expert in your business, but you don’t have to be an expert in everything to avoid these common business killers. The key is to get started early and gather a team of financial, legal and tax advisors who can help. M&T can help you find the people and resources you need.
Disclosures
1 Source: Small Business Administration.
2 Source: https://library.wilmingtontrust.com/my-business/manage-your-investments-as-you-do-your-business-3
3 Source: https://library.wilmingtontrust.com/my-business/is-your-business-ready-for-your-retirement
4 Source: Risk Barometer.
5 Source: https://library.wilmingtontrust.com/my-business/have-you-created-a-transition-plan-for-your-business
This article is for informational purposes only. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.