My dad had what he thought was a foolproof succession plan for his carpet business. We were all fairly young when he passed away (I was only 20), so his plan at that time took into account all of my siblings’ ages. In his will, my father divided the business into five shares. My
three siblings and I were to each get 20 percent of the business apiece, and my dad’s general manager of the business would get the final 20 percent.
The plan was that the manager would run the business, if needed (and it was), until one or all of us was ready to do so. However in the end, it was an unsustainable plan. I was the most likely to take over the business, but I was a good seven or eight years away from being ready to do so. Within two years, the manager was quite unhappy: Here she was, running this business, and 80 percent of the profits were going to my siblings and me. In the end, we sold our 4/5 share of the business to her.
This situation taught me that when thinking about retirement or passing your business on to someone else, it is important to put a lot of thought and planning into the process.
Like so many Americans, it turns out that a lot of small business owners are in fact not prepared for retirement. But the good news is that, to paraphrase the Wizard in The Wizard of Oz, ‘they got one thing most folks haven’t got – a business.’ And it is that business I want to focus on today.
Here are a few tips to help you maximize your business’ value for both you (as a retirement asset) and your loved ones (as an estate asset):
1. Get things in order: Whether you plan on passing your business on to your family or selling it to plump up your retirement account, you will need to get an accurate valuation of it (see below). And to do that, you need to start by getting the business in tip-top shape:
- Get the books in order: The fact is, entrepreneurs are great at many things, but accounting is not always one of them. If this describes you, it would be wise to hire a CPA to get the books in order, including a list of assets, a profit and loss statement, a list of accounts, etc.
- Spruce the place up: Just as you would get your home ready before you put it on the market, you need to get your business ready as well. Clean out the back storeroom, paint if needed.
2. Get a valuation: You may have an idea of what your business is worth, but more than likely, it is more a notion than a legitimate number.
It is important to have a professional valuation conducted by a business broker or appraiser. Most businesses are appraised by looking at the assets, subtracting the debts, and giving a multiplier to the profits (it depends on the type of business and industry whether your multiplier is 2x profits, or, say, 6x profits.) But a professional will know. They will review your financials, look at the business, analyze profits, know the multiplier, and give you a value for the business.
3. See an estate-planning lawyer and/or accountant: When looking to sell or pass on your business, it is neither the time nor the place for playing lawyer or accountant. Again, this calls for a professional, maybe two.
If you are going to sell your business, your estate-planning lawyer or accountant should have some valuable strategies in place to help you, for instance, mitigate taxes. He or she will also likely give recommendations on how to best invest this money into various retirement vehicles.
If you are going to pass it on to a spouse or your children, knowing what it is really worth will be invaluable to you and your professionals, as you look to divvy up your estate. Your attorney may advise that you set up a trust and put the business in it, or sell it when the time comes, it all depends.
The most important thing to remember is that you have created a substantial asset in your business and the smartest retirement plan is to maximize its value for you and your loved ones.
How have you started planning for retirement? Share your story below.
About Steve Strauss
Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss