We mean REALLY transition the business. Many business owners are quick to say yes. However, in many cases these owners are referring to turning over the operational headaches and challenges of the business such as managing employees to someone else. Rarely have they positioned the business to effectively be transitioned to their successor(s) which has a direct impact on business value. In order to do so, several issues must be addressed. Today let’s focus on one of those issues which is often improperly understood and therefore neglected: Personal Financial Planning.
According to the International Succession Planning Association, personal financial planning is comprised of four components:
- Wealth accumulation independent from the business
- Credit continuity
- Estate planning
- Exit strategy
In order to transition the business each of these components must be given proper attention by your advisory team which may consist of multiple professionals such as your attorney, accountant, succession planner, financial advisor and lenders to name a few.
Developing wealth independent from the business is paramount to an effective business transition. Most business owners reinvest their profits back into the business in an effort to provide working capital and grow the business. These are worthwhile business practices (in some cases absolute necessities) especially when the business is relatively new and is expanding. However, it is important that over time you also work towards developing a pot of wealth independent from the business. Having peace of mind that your financial security is not dependent upon the future success of the business will enable you to be more prepared for a transition.
Consider the following for accumulating wealth independent from the business:
- Define what financial security means to you.
I have encountered individuals who have modest net worth and feel financially secure as well as individuals with significant net worth who grew up in the depression and are fearful they will be financially dependent upon their children.
What does financial security mean to you?
- After you have defined financial security, develop a specific game plan to achieve your financial security goals.
- Develop a relationship with a trusted investment advisor.
- Develop an Investment Policy Statement to formalize your investment objective, govern your portfolio’s asset allocation and establishes performance benchmarks.
- Rebalance your portfolio quarterly or at a minimum once per year.
Did you say credit continuity? Absolutely!
Just because your successor may have the same last name as you does not necessarily mean credit continuity is automatically transferable to your successor(s). Capital is the life blood of a business and often time’s access to lending capability is predicated upon the financial backing of the current owner through personal guarantees. Credit continuity is not automatic. It must be achieved pragmatically and strategically over time.
Depending upon economic conditions, credit continuity can be more challenging. For example, let’s examine the current state of the economy. Banks and other lending institutions are writing off significant losses. Lending requirements are becoming more stringent in light of the recent sub-prime mortgage debacle. Additionally, circumstances such as the predictable dip in profitability during a business transition and estate liquidity needs could also impact access to business capital.
Consider the following to ensure credit continuity with your lending institutions.
- Educate your successor in the financial management of the business not just operations.
- Involve your successor in meetings with lending partners so that he/she can begin building relationships and give critical lending partners confidence in their ability.
- Develop a strategy to transfer financial responsibility and liability over time.
We have covered wealth accumulation and credit continuity, now let’s look at another component of Personal Financial Planning, which is developing an exit strategy.
In the past five years, I have encountered several business owners who have expressed a desire to transition their business to either family members or entrepreneurial key managers. Many of them believe they are ready to turn over the reins but all too often they have not considered all of the implications and the vast majority have done very little to facilitate an exit strategy for various reasons.
To get you started or to make sure you have thought through your plan, consider these three very important aspects when developing your exit strategy:
- Financial Implications:
Do you have enough money to retire or step away from the business? If not, what role will the business play in your retirement? Is your financial security tied to the future success of the business? Can your successor afford to buy you out? Is a sale the best option? What are the tax implications of a sale?
- Managerial Implications:
To what degree is the business dependent upon you for day to day operations and decision making? Have you identified and prepared your successor to effectively lead/manage the business? What role will you play (if any) once a transition has been made?
- Emotional Implications:
What will you do with yourself after you withdraw from the business? For many, the business has been their identity and most of the relationships they have are associated with the business.
Remember, an exit strategy is like a relay race: one person must be willing to financially and emotionally hand off the baton and the other must be capable, committed, courageous and willing to take the baton and continue the race. It is a transition, not a transaction.
The succession of your business involves addressing various interdependent issues. Hopefully the considerations above have increased your awareness and stimulated your thinking as to how various areas of your planning can impact your exit strategy, succession goals, and ultimately the value of your business.
How well prepared are you?
David Ciambella, CFP, is a Partner with The Rawls Group. Associated with The Rawls Group since 1996, Dave works exclusively with the owners and key executives of family owned businesses.
David is a co-founder and serves on the Board of Directors for the International Succession Planning Association, which is an organization dedicated to providing cutting edge planning and facilitation resources to business owners, financial and business advisors, associations, and manufacturers. A highly energetic and outgoing succession planning specialist, Dave is a frequently requested speaker by local, state, and national organizations. For more information visit www.rawlsgroup.com.
Used by permission. 2008 TEC Florida. © The Rawls Group |
