Business Owners: Provide Yourself a Secure Financial Future
A primary reason why family business owners find it difficult to let go, passing the reins of the family business to the next generation, is the lack of a secure source of lifetime income. Sometimes the phrase I will never retire really means, I don't think I can afford to retire because if I stop working, I won't have an income.
For some owners of small or marginal businesses, inadequate profitability may make putting aside for retirement difficult if not impossible. That explains, in part, why a recent poll by the National Association for the Self-Employed found that only 7.5 percent of its members felt very confident about retirement while 56.6 percent felt not very or not at all confident.
Many business owners make their businesses their first financial priority. Understandably, they keep cash in the business in case of emergencies and see investments in their own businesses as their best opportunity for returns. A fast-growing small business can be a cash-consuming animal with a debt-averse owner the only source of food and care for the beast.
But if you are truly a family business and if it is really your cherished dream to see your business prospering in the next generation, you owe it to yourself, your business and your family, to find a way to provide yourself with a reliable stream of lifetime income.
Many family businesses seek to solve this problem with a lifetime salary continuation agreement, an installment sale of ownership, or a long-term lease on property owned by the parental generation. Any of these methods can work as long as the business is healthy. But too often, salary continuation means not having money to pay needed executives. In a tight cash-flow situation, installment sale payments may be compromised. A long-term lease may detrimentally tie the business to facilities or locations that hinder business success.
The better approach is to plan for retirement far in advance. You should be funding retirement by establishing a tax-qualified or nonqualified retirement program through your business; by paying yourself enough through salary, bonuses or distributions to build appropriate assets outside of your business; or both. Your goal should be to provide yourself and your spouse a secure and generous lifetime stream of income unconnected to your family business. Then you need not worry about the business or feel pressured to intervene with next-generation leadership for the sake of your own financial security.
In our consulting work, we sometimes find potential successors who feel underpaid. They are quite surprised when our advice is that their parents are ones who should be getting a substantial payout boost. The extra money, we explain, will provide for their parents lifelong financial security, a necessity if the younger generation hopes to assume meaningful business leadership on a timely basis.
To the older generation we explain that if they ve created and sustained a healthy business over a career, they've earned their reward. We also explain that financial security outside of the business represents a prudent diversification and reduction of risk, and that it maximizes their flexibility in terms of how they will ultimately transition the business (sale, gifting, etc.).
Your financial advisers can help you to determine the best and the most tax-efficient ways for you to achieve the goal of providing secure, non-business life-long income. Do it for yourself and for your business's future.
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