What’s In a Family Business Financial Plan?

Your financial plan is a model for your present and future. Like a business plan outlines the big picture of your company, a financial plan helps your money take shape. 

A solid financial plan always starts with you—your goals and values for the future. Understanding your short, medium, and long-term goals bring depth and context to your money and set up a natural blueprint for a strategy to help you achieve them.

Many family business owners share similar goals:

• Building a profitable business

• Creating a seamless exit strategy

• Passing the business on to family or trusted colleagues

• Crafting a fulfilling retirement plan

• Establishing a lasting legacy in their family, community, and industry

These big picture goals are the catalyst to creating a custom saving, investing, giving, and growth plan that works for you and your family.

Why Family Businesses Benefit From Comprehensive Financial Planning

Now that you understand the foundation of a small business financial plan, what does it mean for it to be comprehensive? 

 A comprehensive plan leaves no stone unturned; it’s an opportunity to evaluate your plan—personal and business—from several vantage points to paint a clearer and richer picture of your financial life. 

 We’ll look at things like,

•  Your goals, values, and vision for the future. And how to bridge the gap between where you are right now and where you want to be. 

• Investments—allocations, risk profile, time horizon, and more

• Family business. Together, we’ll build a plan that helps you grow the value of your business and create a seamless transition/exit plan when you’re ready for your next step.

• Insurance needs. Do you have the appropriate coverage for you and your family?

• Charitable giving. How can you give in the most efficient and effective ways?

• Estate planning. How can you meaningfully transfer assets to the next generation? What does your legacy look like, and how can you intentionally craft it?

• Tax planning. By creating a financial plan, you can visualize and quantify the impact of using tax strategies that actively reduce your tax burden.

• Retirement planning. Here, we help you make the most of your funds with a strategic withdrawal plan, maximize Social Security, enroll in the right Medicare plan, and live a purposeful life. 

And more.

Your financial plan should be a living and breathing document that changes as you grow and evolve. Just like your family business has likely changed over the years, your finances won’t stand still. You need a nimble, agile plan that can contour to whatever shape comes next. 

A comprehensive financial plan gets to the root of your values, helps you set meaningful goals, and builds a strategy that instills confidence and vision. Your plan also allows you to assess your risk tolerance, cash flow, and the timeline to reach your goals.

Unique Financial Considerations For Family Businesses 

Remember, family businesses are integral to our economy. Currently, they make up 64% of the gross domestic product (GDP) of the United States.

 Family businesses make a big splash in local and national economies and are responsible for much job creation. 

But for all the good family businesses bring to the world, they also experience unique financial considerations. Recent research from the Exit Planning Institute discovered that 80 to 90% of business owner’s net worth comes from their business, meaning that nearly all of their financial security is tied to their business’s fate. 

 Plus, 70% of affluent families will lose their wealth by the second generation. More surprisingly, 90% will lose it by the third. 

 These facts make comprehensive financial planning all the more pertinent for family business owners. By constructing a plan for your family and business finances, you set yourself up to improve your financial life and, most importantly, the quality of your life. 

 Financial planning for family business owners covers a vast array of components, like:

• Business succession planning

• Business value growth planning

• Business financial planning

• Financial statement analysis

• Custom business analysis for leaders and shareholders

• Exit planning, capital raise, and due diligence preparation

• Custom “what-if” scenario modeling

• Financial technology strategic consulting

• Cash flow forecasting

• Accounting software upgrade consulting

• Merger & acquisition (M&A) analysis and consulting

• Accounting and finance staff training and onboarding

 I’m a big believer in comprehensive financial planning and wealth management because it opens up the opportunity of enriching your personal and professional life. 

 A strategic exit plan may be one of the most significant roadblocks hindering small business owners from retiring the way they want. What’s a succession plan, and why do you need one?

Let’s find out.

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The Core Building Blocks of Small Business Succession Planning

For years, you’ve put your heart into building a successful business. But have you considered how you’ll say goodbye? A recent study suggests that six out of ten business owners plan on selling within the next decade 

If this sounds like you, the time to start thinking about a comprehensive succession plan is now. 

Why? 

A succession plan is key to growing your company’s value, ensuring a smooth transition, and helping you make your next steps more intentional. 

 I focus on helping business owners grow, manage, and transition their businesses. If developing a succession plan is something you need to start considering, focus on these seven building blocks first. 

1. Set a Realistic Departure Timeline

Most businesses don’t sell overnight. The transition process takes time and thoughtful planning, which is essential for protecting the future well-being of your business and potential successors.

 If a transition is coming, help ready your managers, employees, contractors, and other involved parties for the change. New leadership can be intimidating to current employees, so use this time wisely to get them comfortable with the transition and excited for what’s to come.

 As the process of selling or transitioning your business begins, I can help by examining all aspects of your larger financial picture, including: 

• Your current savings

• What the business is worth

• How it plays into your estate plan

 Getting the complete picture of where your business stands today and what you’d like to see for it in the future can help us develop a custom timeline that works for you.

Consider Your Emotional Well-Being

As you think about timelines, don’t forget to consider your emotional well-being. It may take some time to emotionally prepare to step down as CEO or president. This company is something you spent years building. What will life look like once it’s out of your hands?

 It’s often best to consider a transitory position to help ease into this next chapter. These positions can keep you involved in higher-level decisions regarding your business, without requiring your attention for day-to-day operations, like becoming chairman of the board, consulting with leadership, or offering your assistance part-time.

 Operating in this way tends to be a more feasible option for business transitions that stay within the family. If you’re selling to an outside third party, they might not want your involvement after the sale is final.

2. Know What the Business Is Really Worth

You may already have a ballpark figure of what your company is worth. But before starting to plan your exit strategy, establish a concrete number with a formal evaluation of your business.

 Why is a concrete number important? 

 Because most small business owners’ net worth aligns with their business’s worth, meaning they’ve tied a lot of their wealth into the business. Because of this entanglement, it’s impossible to know how much you’ll have to sustain your retirement until you understand what your business is worth.

 Getting a business valuation will paint a better picture of how much you can expect to walk away with. If you’re likely to get less than you anticipated, you need to decide how to make up the difference. 

 Your business’s value is an important consideration, as it could impact your timeline for selling the company and whether or not you’ll continue working after doing so.

3. Identify a Strong Successor

What do you want to see in a future leader of your company? Consider these qualities carefully as you decide who will usher your business into its next phase. Who you choose now may very well define your company’s legacy.

 There may be pressure to pass your business on to a child or relative, and in some cases, that choice may work out great. Don’t, however, feel like you have to keep your business in the family, especially if you can’t identify a strong leader amongst your blood relatives.

 Consider all potential candidates, including strong leaders within your company, trusted colleagues, or other industry professionals. The choice, ultimately, has to be the person you feel most confident in continuing your legacy.

4. Cultivate Steady Leadership

While your successor sits at the helm, it takes an entire team to steer a ship in the right direction. Have steady and robust leadership ready to step in as you prepare your exit strategy.

 Success starts from the top-down, meaning your leadership team will set the tone for the transition. If they’re confident and prepared, employees will feel comfortable as well. 

 But if they’re jumbled, confused, or disorganized, that energy will trickle down throughout the company.

5. Keep Your Employees Bought-In

As a business owner, you already know the value of attracting and retaining top talent. If you don’t want employees jumping ship during your transition, you must keep their feelings and concerns in mind. Keeping employees in the dark will only shock and hurt them. 

 Instead, commit to transparent communication about what’s happening.

 Use this time of transition to take their comments and ideas into consideration. If there are things you can change in the workplace to better meet their needs, don’t be afraid to adapt. 

Keeping your employees engaged throughout the transition can help your business better retain top talent as new leadership moves in.

6. Consider the Types of Business-Sale That Make Sense

The way you choose to transition your business is important, especially in terms of taxes. For example, a traditional sale may incur capital gains and income tax.

 There are different ways to structure the sale of your business. In some cases, the sale structure may allow you to defer taxes or reduce your overall tax obligation. As you consider the sale of your business, be sure to work with a knowledgeable tax expert who can help determine the right course of action.

What About Gifting?

It may be feasible to gift your business to a loved one. Be sure they’re fully aware of the commitment involved with receiving your business, and they’re prepared to step up as a leader when you step down.

 Take a look at the annual gift tax exclusion set by the IRS in addition to your lifetime exclusion. Those numbers can help you understand how much you can give to someone without reporting it to the IRS. And if you do exceed those limits, how much of a dent that puts into your lifetime gift limits. 

 Again, taxes in selling or gifting a business can get complicated, and working with a tax professional is advised before making any significant changes to the ownership of your business.

7. Work With a Team of Specialists

Succession planning requires several moving pieces, making it imperative to have the right professional team on your side—financial planning, attorney, tax professional, business valuation expert, etc. 

Each person can help you navigate the ins and outs of the transition, so it’s as smooth as possible for you when you’re ready to take the next step

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A critical part of succession planning is building an exit plan. 

A strong exit plan strategy is critical for your financial well-being as a business owner. Far too often, people put their exit plans on the back burner, which can cause more stress later.

Your Family Business Needs An Exit Strategy; Here’s Why

Moving on from a business you’ve spent a significant amount of time and energy building is never a simple process. You’ve put in sweat equity, time, investments, assets, and more.

Along with financial considerations, it can also be an emotionally turbulent time. This is true whether you have a succession plan in place or not.

You want a well-considered, strategic plan to help you, your business, and your clients as you move into this next phase as a business owner. As a starting point, your exit plan should consider the following:

• How long do you want to remain in the business?

• Do you want to stay in the business? If so, in what capacity?

• Your financial expectations

• Any investor or third-party compensation that must be considered

No matter where you are in this journey as a small business owner, the most essential thing you can do today is proactively plan your exit strategy. By planning several years in advance, you can enhance the value of your business and get more for all of your hard work.

General Exit Plans Small Business Owners Can Consider

There are several strategies for moving on to the next phase of your business, and it all depends on which is most optimal for you. Let’s take a look at the most common considerations.

Sell The Business

As the business owner, you can sell your company to anyone you like, such as family, an internal employee, on the open market, or via a merger or acquisition. By selling the company, you can (mostly) control all of the following:

• The price you sell your company for

• Whom you sell your company to

• Your role in the company moving forward

As a simple example, if you want to sell your business to your daughter and stay in a consulting capacity, you can quickly write that arrangement into the agreement.

Selling your business should be strongly considered if you need liquidity to fund your retirement plan. With proper planning, we can get strategic and creative in our agreements and find a win-win conclusion.

There are several strategies you can deploy when it comes to financing the buy-sell of a business. While some of these ideas can get a bit in the weeds, below is a list of some standard financing techniques for a buy-sell of a small business:

• Family sale buy-sell agreement

• Coordinating the sale of your business with gifts

• Installment sale

• Private annuity

• Self-canceling installment note (SCIN)

Liquidate The Company

While liquidating is most people’s last resort, any small business owner could choose this route. In this case, you would close the business and sell off any assets related to your company.

Liquidating your company isn’t always ideal because your only profits come from what you can sell. Priceless assets like client lists, business relationships, and other intangibles won’t hold much value, even though these elements would be critical in a business sale situation. 

Your business holds value, and your exit strategy must reflect it. We can help you create a robust plan that accounts for your present and future goals so you can walk into the next phase of your life and business with confidence and fulfillment.

Let Your Exit Strategy Support Your Financial Goals

Building a successful business is no small feat. For most small business owners, their business usually represents the vast majority of their net worth, which can come with its own set of risks.

The primary risk is achieving other financial goals, especially retirement. This is why having an exit plan is so critical. 

In your exit plan, prioritize carving a path that helps you reach all of your financial goals. Perhaps the proceeds from the business sale will buy your retirement home or pay off any remaining debt.

If you ever want to step away from your business in the future, it is vital to do two things: 

1. Build a nest egg outside of your business and,

2. Create a strategic exit plan.

Completing these two tasks puts you on the path to attaining your retirement goals.

You’ll also have additional considerations in the following areas: family and taxes.

When Family Is Involved In Your Exit Strategy

If a family member is involved in your succession plan, it will be important for you to gradually and intentionally step away from the business. 

Doing so is critical to enable your family members or children to grow into the leadership position you have held for so long. There are several emotional, psychological, and financial considerations when family and business mix, and I can help you create a plan to navigate this transition with purpose and ease.  

Income And Estate Tax Considerations

Taxes play a significant role in any financial planning item, and exit planning is no different. 

You should put a great deal of thought should into your strategy around gifting vs. selling the business. Doing so will ensure the transaction works for your and your family’s long-term benefit.

Exit Planning Takes Work, And A Lot Of It

We have seen second or third-generation siblings fight over the family business (or land) due to succession planning that was delayed too long. Pushing off the “hard conversations” around estate, tax, business, and succession planning can mean the difference between the success or failure of a family business.

Furthermore, it can negatively impact the personal relationships, health, and financial well-being of all parties involved.

Remember, it is crucial to build a team and work with a competent lawyer, tax professional, and financial planner when it comes to exit planning for small business owners.

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