Your business may be the largest asset in your retirement portfolio, but converting it into an income resource for retirement takes planning to ensure it has value, even after you are no longer at the helm.
“It’s important to start with the end in mind. What are you trying to accomplish?” says Sabrina Lowell, CFP®, principal and COO at Mosaic Financial Partners.
Those using their business as a retirement asset need to decide if they want the business to continue independently after they retire, or if they want to sell it, she says. In either case, business owners must come up with the end game before figuring out how to get there.
Smart Business spoke with Lowell about being purposeful with business planning and recognizing how much lead time you need to accomplish your goals.
Why is it important to manage a business as a long-term asset?
If you’re looking to exit, whether through retirement or a sale, and you haven’t purposefully mapped out a plan in advance, your business may end up without as much value as you thought. Some things to consider are:
- The health of your customer base. Is your client base aging with you? This can be a concern if there’s a sole owner, or even a few owners of a similar age.
- Human capital. Do you have an aging set of employees? Have you been bringing in the next generation, mentoring employees as future leaders?
- Product offerings and innovation. Are your products and/or services evolving and relevant to the current market?
What must a business owner consider when preparing for an exit?
When you’re clear about your objectives, decision-making becomes much easier. As a business owner, think about what your goals are for the business long term. The goals should be simple and concise so that they can be used to test alternative decisions that arise during the years an exit plan often takes to implement. These objectives are often qualitative, such as:
- Sustain client service standards.
- Take care of employees.
- Maintain company culture and values.
- Further the industry.
How can you keep long-term planning from falling to the bottom of a to-do list?
Be purposeful about setting time aside to say: ‘What is my vision and how am I going to implement that plan?’ on an ongoing basis. Like any transition, it’s not easy. The more you can set up systems to help support that effort, the better.
There’s no hard-and-fast rule for how much time is needed. There is usually more work on the front end, before the plan just requires maintenance. Important, but not necessarily urgent, strategic planning can often fall to the bottom of the daily ‘to-do’ list. Setting aside 30 minutes or an hour each day to focus on the business can make the process more approachable.
Where can a quality financial adviser help?
A financial adviser can help determine your number — how much you need to get out of the business for retirement. This may give you more flexibility when structuring your exit. Perhaps you get some payment upfront and an ongoing income stream, rather than just payment upfront.
Your adviser will help you discover what the transition is going to look like, and how to begin preparing. It’s always difficult to make decisions around an asset when you have a personal, emotional connection. A financial adviser has an arm’s length perspective that can help with both the numbers and personal side of a succession plan. ●
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
As an in-law coming into a family business, you’re stepping into one of the hardest working environments imaginable. A family member is held to a higher standard than regular employees, but an in-law has to work even harder than a family member.
“It really takes someone with vision and purpose because there will be a lot of extra challenges,” says Ricci M. Victorio, CSP, CPCC, managing partner at the Mosaic Family Business Center.
If you lay the right groundwork, establish clear expectations, and work with an adviser familiar with the challenges that will occur, she says it can be a productive and joyous experience.
Smart Business spoke with Victorio about how in-laws can successfully enter the family business and thrive.
What challenges do in-laws face when coming into the family business?
The hardest thing to overcome is perception. It doesn’t matter if you have an MBA from Cambridge or a Ph.D. from Harvard. When it comes to in-laws, the fact that you married into the business downgrades any credentials in the eyes of non-family managers or employees. People will tend to judge you harshly, so be patient and don’t take it personally.
How can an in-law successfully enter into the business?
The position, pay scale and responsibility must match the in-law’s experience and education. Thrusting an unqualified in-law upon people, no matter how great he or she is, makes it a much harder road. For example, an in-law was a sales manager making six-figures who was downsized. Now, he’s in trouble financially, and the family is worried. The family can bring the in-law into the business, which might be in another industry, but he shouldn’t start as the head of the sales division. He needs to learn the business and earn his way up the corporate ladder. If parents are still concerned about the financial gap, they can consider gifting additional monies from outside of the business — to help until he earns his way up.
It can be helpful to have the in-law candidate interview with the executive management team to gain support.
How can in-laws overcome the assumption that they have the boss’s ear?
You can’t expect the employees to be your friends, because they are going to assume that anything they reveal will get back to the boss. It can feel isolating and you have to be above reproach. Stay professional and never assume to be the heir apparent.
Also, if you have a problem, resolve things through the proper chain of command. If you’re not reporting to your father-in-law, don’t go to him when you have an issue.
Remember when you come home and complain to your spouse about work that you’re talking about a family member. Your spouse may get defensive, run to whomever you’re complaining about or start disliking that person. Try to share more than just the bad days.
What documentation is needed to protect the business, and the in-law?
Families with a high net worth business typically will require a prenuptial agreement that protects the stock from leaving the family in the case of divorce or death of the blood relative. However, there are incentives such as restricted or phantom stock for high-performing managers, which can provide financial incentives that feel like ownership for growing the company.
It’s also critical to create family member employment and stock qualification policies. These policies define the benchmarks and requirements for all family members, whether an in-law or not, as to how they can become stockowners or hold key executive positions, clarifying the pathway and making family employees more accountable.
Why is having a succession coach valuable?
Engaging a coach who specializes in succession transitions to help employed family members can smooth the predictable challenges along the way. Family employees, including in-laws, need a safe place to talk, and guidance to strategize through the maze of issues that will occur. The coach also can facilitate a family business council, which provides a venue for family members to talk about business related topics, questions and issues that would normally feel inappropriate to bring up in a productive environment.
Ricci M. Victorio, CSP, CPCC, is a managing partner at the Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
There’s a popular metaphor referred to as “the boiled frog.” Simply put, it says if you drop a frog in boiling water it will quickly try to escape. But if you place a frog in tepid water that’s slowly heated to a boil, the frog will “unresistingly allow itself to be boiled to death.”
With the 2013 tax changes, this metaphor may apply to taxpayers, married and filing jointly, with wages of taxable income of $223,000 to $450,000, says Geoffrey M. Zimmerman, CFP®, Senior Client Advisor at Mosaic Financial Partners, Inc. These households could see their federal marginal tax rate go from 28 to 45.5 percent.
“Executives in this income range may soon find that they are in hot water with the heat on as the marginal tax rates ramp up fairly quickly,” Zimmerman says.
Smart Business spoke with Zimmerman about key tax changes as well as possible planning and investment strategies.
Why are $223,000 to $450,000 income earners unaware of the danger?
The increases come from moving up tax brackets, new Medicare taxes of 0.9 percent on payroll and 3.8 percent on unearned income, and the phase-out of itemized deductions. People earning more than $450,000 have a good idea of what’s coming, but others aren’t as prepared for 1 to 2 percent increases that can add up. For example, if each spouse earns less than $200,000, their employers aren’t required to withhold additional taxes from their paychecks for the 0.9 percent increase in Medicare. But, if their combined income pushes them over the $250,000 threshold in household wages, they may be surprised by an unexpected tax bill.
Additionally, if you live in a state like California where state income taxes have gone up, combined federal and state income tax rates can exceed 50 percent, with capital gains rates reaching 33 percent or more.
What should these taxpayers be doing?
First and foremost, don’t let the tax tail wag the dog. Tax strategies that look great in a silo may actually be detrimental to the big picture. If your strategy puts you in a concentrated position or triggers undue risk, then a sudden bad market movement can be worse than paying the taxes.
This is an opportunity for people to update their financial plan and review how the tax changes affect their goals. Make sure your advisers are talking with one another and coordinating their work and advice.
How can some key planning strategies mitigate these increases?
Look for opportunities related to the timing of cash flows. If you have a big income year where up to 80 percent of your itemized deductions might be lost, defer some itemized deductions to the following year where the income might be lower. In a low income year, look at doing IRA to Roth conversions, realizing capital gains and/or accelerating income.
Take the initiative to engage in tax loss harvesting in taxable accounts, which means you sell a security, harvest the loss and then use that loss to offset a gain in either the current year or carry forward for use in future years. This can be attractive, particularly for investing styles that offer similar but not identical alternatives. One example might be to sell an S&P 500-index fund and reinvesting with a Russell 1000-index exchange traded fund to capture the loss while remaining invested.
Review the use of asset location strategies to improve tax efficiency. Strategically place securities that produce ordinary income or that generally don’t receive favorable tax treatment into a tax-deferred account, while putting tax-efficient investments that generate long-term capital gains or qualified dividends in taxable accounts.
Municipal bonds/bond funds in taxable accounts now may be more attractive, and you also can review opportunities to take advantage of ‘above the bar’ deductions, such as contributions to qualified plans like your pension, 401(k), etc. For senior executives, contribution to nonqualified deferred compensation arrangements may be more attractive, particularly if a transition, such as retirement, is on the horizon.
With the help of good advisers who understand these moving parts and how they fit together, executives can use these strategies and others to make better decisions to move toward the things that are really important to them.
Geoffrey M. Zimmerman, CFP®, is a senior client advisor at Mosaic Financial Partners, Inc. Reach him at (415) 788-1952 or Geoff@MosaicFP.com.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
When choosing a wealth advisory firm to partner with, there are a number of characteristics you should look for to ensure the firm is well equipped to address your unique needs, says Norman M. Boone, founder and president of Mosaic Financial Partners Inc.
“With so many firms out there, it can be difficult to identify the right one for you,” Boone says. “You should expect a lot from your wealth advisory firm, and knowing what to look for can help you make the right choice.”
Smart Business spoke with Boone about the keys to choosing a wealth advisory firm.
What are some key characteristics when seeking a wealth advisory firm?
Professional success is based on a firm caring about its clients, being sensitive to their needs and concerns, providing a high level of expertise and doing what it says it’s going to do. A wealth advisory firm should empower clients by providing them with financial education to help them feel more comfortable and allow them to make better-informed financial decisions.
You want a firm that is willing to commit to being a fiduciary — always putting the needs of its clients first. Independent firms are beholden only to their clients and have no other loyalties. How the firm is compensated is important. Fee-only firms are paid only for their advice and service. They avoid the potential conflicts of interest of receiving commissions, referral fees and the like.
Look for a firm that you trust and respect, and that trusts and respects you and your needs. The firm should aggressively honor the confidentiality of its clients. You should have a relationship with a team of people at the firm, not just one person, so you can benefit more from their collective expertise. Look for a firm that is large enough to bring the necessary resources to bear, yet is still small enough to remember that its members work for you.
Your wealth advisory firm should stay in the forefront of technology development to be equipped to meet your needs. It also should be committed to its employees, providing a good work environment and building the professional capabilities of staff with ongoing education and training.
How important is transparency?
Transparency creates the basis for trust. The firm and its members should be willing to answer any and all of your questions. In addition, objective, unbiased and personalized advice should be the foundation of every client relationship.
The firm also should offer a fully customized investment policy statement for every client providing a unique ‘road map’ for how that client’s money is to be managed. An investment process works best when it is disciplined, thoughtful, strategic, tax- and cost-sensitive, and well diversified. The investment world is constantly changing, and it’s important for a firm to stay ahead of the curve, choosing an independent course that reflects the best research and thinking of its members.
How should a firm tackle financial planning?
Financial advice shouldn’t just be about investments. Financial planning should be the underpinning of how the firm serves its clients. Financial planning is a lifelong process — as your circumstances change, plans should be updated. Good advice must be given within the context of your total circumstances and specific needs. When other expertise is required, it is the firm’s responsibility to recommend other professionals who are able to meet those needs.
Should a wealth advisory firm’s actions go beyond financial planning?
Your advisory firm should respect the importance and distinctiveness of the many pieces of your life, while embracing how those pieces fit together. The firm should answer your calls promptly and always be thinking about how they can serve you better.
Your financial adviser can and should be your partner — always sensitive to your particular needs and concerns while giving you the best advice for your circumstances in the framework of the current laws and world context. If you don’t trust them and look forward to receiving their advice, you may want to look for a different adviser.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1952 or email@example.com.
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Your company’s goals aren’t just a to-do list of action steps, they’re a vision of where you want to be. Employee engagement can be a way to make your business exciting while unleashing the creativity of your intellectual capital.
“It can seem overwhelming if you don’t have experience setting goals, especially if you’re a business owner who is really working in business,” says Ricci M. Victorio, CSP, CPCC, managing partner at Mosaic Family Business Center. “So, it’s not a sign of weaknesses to ask for help and bring in someone who knows how to coach you, train your organization and facilitate those discussions. If it can move your business forward, energize it and make your life easier so you can enjoy being in the business, it’s really worth it.”
Smart Business spoke with Victorio about what steps to take when setting goals and following through to ensure your vision comes to fruition.
How should business owners set goals?
Once the company’s growth and revenue goals have been established, ask your team for their ideas regarding how to get there. Engage your employees in building the road map to success.
Create breakout groups to work on an annual Strength, Weakness, Opportunity and Threats (SWOT) analysis. By graphing these and seeing correlations, employees help prioritize the two to five opportunities that will significantly help your company. With employees sufficiently motivated to take full ownership in the idea, they can then work in teams to help see the project through development and ultimately reach the goal, which is done in addition to the day-to-day duties.
How can you tell employees aren’t engaged?
There will be complacency and all kinds of reasons, excuses and blame for why employees can’t accomplish the goals set before them. They sit around waiting to be told what to do. There’s a sense of isolation and feeling that nobody is paying attention. You’ll see flat production and even downward trends, as well as higher absentee rates.
Lead employees, rather than dictate assignments, and then get out of their way. A leader removes obstacles so the team can achieve the goal. By giving employees authority, you show respect for their intelligence and ability to solve problems. Successful organizations recognize intellectual capital goes beyond the executive circle. If all employees engage in the company’s vision, regardless of their level or position within the organization, then leadership trickles down so everyone contributes to furthering the company’s goals, which are their goals, too. Actively engaged employees do more than you would have asked and hold themselves accountable to goals they helped set.
In addition to treating employees with respect, acknowledge what’s being done right. Recognize that if there’s failure, it’s more the manager’s failure than the employee’s.
Once you’ve set goals, what’s the key to keeping on track throughout the year?
At minimum, hold quarterly or monthly check-ins that provide opportunities to make course corrections. With the business plan and goals, you can create an action spreadsheet to see progress and identify what’s stopping forward movement. The more intimate the check-ins, the more effective they’ll be.
Also, communicate back to employees to keep them engaged. Some companies have adopted a report card with updates on strategic projects. The strategic projects that change the way you do business are exciting, creative and generate a lot of energy.
How can you learn how to lead this way?
There are books and successful examples, and you can work with a coach who knows the process, can motivate people and teach managers how to lead meetings. It’s hard to facilitate your own meeting and take an objective, honest look at how you’re doing.
Setting and achieving goals doesn’t have to be difficult. Once you put these practices in place and overcome the learning curve, life will be easier. You won’t have to spend all your time feeling like you are grasping at loose ends — and you’ll begin to see the grand design weaving together into a cohesive and beautiful creation.
Ricci M. Victorio, CSP, CPCC, is managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners
There are a number of reasons why you might want to sell or transfer your business. Some serial entrepreneurs find they like to start businesses but don’t really like to run them. Others have been around for a long time and are just getting tired or too old to stay in their role.
Some owners may have maximized the value of their company. Perhaps your personal balance sheet needs more diversification because 95 percent of your value comes from the business, so you bring in partners or sell a portion to employees, giving yourself more options and downside protection.
Whatever the reason, Norman M. Boone, founder and president of Mosaic Financial Partners Inc., says there are a number of questions to answer if you’re a business owner moving through the transition process.
“It’s really important to focus on your personal needs, both financially and emotionally,” he says.
Smart Business spoke with Boone about asking the right questions prior to a sale and how to deal with the financial and emotional issues.
What are some key factors business owners need to understand about selling or transitioning from a business?
There are six key things that they have to be thinking about and understand:
• What’s the business worth?
• Do you have a plan of who is going to come in and operate the business successfully when you are gone?
• Have you been too busy running the company to consider personal issues like your own estate plan, will and insurance?
• What do you want in terms of lifestyle? Do you want to keep running this business until you drop dead, or do you want to sell it and go onto the next business? What are your criteria and where do those triggers happen? Do you want to be working full time or part time? Do you need control of the business or not?
• If your personal finances are completely reliant on the business, what’s your extra exposure of not having diversification? If something were to happen to the business, would you and your family be OK going forward?
• What are some tax issues you could face with a sale or transition?
Why is it so important to ‘know your number’?
One of the key issues when it comes to selling a business is that people don’t know how much money they need to be able to live their life comfortably and successfully for as long as they and their spouse might live, factoring things in like medical care and Social Security. For example, if somebody spends $100,000 a year, maybe they need $2.5 million in assets to support that. If your lifestyle is more expensive, then you need more dollars, and knowing what that number is, whether it’s $2.5 million, $5 million or $15 million, is pretty important before you start to negotiate a sale.
If you sold your business for $6 million and after taxes you’re left with $4 million, you’re going to be frustrated if that’s not enough to support your lifestyle for as long as you might live. You may not be able to continue living as comfortably as you were before.
Is there a disconnect between what people need to live on and what their company will actually sell for?
As a general rule, people overestimate what a company could sell for, particularly on an after-tax basis, and underestimate how much capital they need to support their current expenses. That combination means that often people are really frustrated. They might get right to the edge of the deal, and suddenly realize, ‘Oh gee, I can’t do it on this. I need 2 million extra dollars to sell the business.’ You see deals fall through reasonably frequently because of that.
Once you know your number, you can do things to make the company more valuable. Get your accounting in good order. Minimize expenses in order to raise profitability. Grow the business in terms of sales. Have a brand that is as well known as possible. In addition, the less dependent the business is on you as an individual, the more it’s worth to somebody else, because if you’re critical and are replaced, then it’s very possible that operation could fall apart. Therefore, build in systems, processes and procedures to bring along key employees so they can continue to manage the business without skipping a heartbeat.
Why is it important to focus on what comes before selling?
If you’ve been running a business for 25 years and you’re being asked to let go, it’s not easy. You get emotionally attached to it and, as important, your identity is tied up in being the owner of that business. If you sell the business, what is your identity? What are you getting up for in the morning? This issue comes up all of the time. It’s one of the reasons why people don’t have a succession plan and why they don’t sell when they need to.
Owners need to try to think about what other things they want their life to involve, and then prepare and practice doing that before the sale. It could be getting involved in nonprofit organizations or sitting on the board of a couple of your friends’ companies. Business owners should retire to something, rather than from something. In the ideal world, the person who is selling the business is inevitably sad, but ideally, they are excited about what it is that they are going to do once they have more free time.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc., which is celebrating, this year, its 25th anniversary. Reach him at (415) 788-1952 or email@example.com.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners
When planning for your business, you determine your purpose, your values and your goals. Your business plans consider your strengths, weaknesses, opportunities and threats. You plan ahead to avoid shortfalls in funding, materials or capacity, and you create strategies for growth.
Is it possible that your personal life would benefit from planning the same way?
“The business world has established good models for planning and strategizing how the business is going to attack the future, but few individuals spend as much time thinking about their own future,” says Norman M. Boone, founder and president of Mosaic Financial Partners Inc. “As a result, they end up being victims of circumstances as opposed to managing their lives and influencing outcomes.”
Smart Business spoke with Boone about managing your personal life with the same attention to detail you give your business.
How can business owners apply their management skills to their personal lives?
There are three fundamental steps. First, figure out your purpose, your values, beliefs and principles, things you hope for in the future and the approach you’ll take. Once you get that clear, it makes everything easier.
In your business, your mission statement creates clarity and gives everyone a purpose. The same is true in a family, where a mission statement gives you a frame of reference for making decisions and allows you to talk about who you are as a family or as an individual. Having clarity about your purpose gives meaning to your days and your interactions.
What goals do you want to accomplish in the next year, and the next five, 10, 20 years? You think about that in business, because you’re not going to be successful if you only deal with the day to day. That’s equally true in life.
Once you have your purpose, what is the next step?
The second step is to consider your resources. What do you have? What will you need? What are your assets and liabilities? How much are you worth? What do you need to do to change that over time? The real issue, with both companies and people, is whether you are improving your lot over time.
For most individuals and families, the key question is: How much do you need to be financially independent? For some people, it is a relatively small amount; for others, it is a big number. But you need to know what your number is so you can plan accordingly, so your net worth can reach that number.
How can someone determine that number?
For most people, the two most critical future requirements are paying for the kids’ education and for the needs they’ll have in retirement. Some have additional desires, like second homes, caring for a parent, buying a business or leaving something for heirs or a charity. A financial planner can help you assess how much each of these might require and how much you need to save along the way.
Life doesn’t usually go as planned, for businesses or individuals. Consider various scenarios and how your goals and/or your needs will change with each. What if you have a third child? What if you pay for all of college instead of 50 percent? What if you retire five years earlier or later than you planned? As you explore the different scenarios and figure out what you need to succeed in each, you’ll begin to see what variables have the greatest influence on getting the numbers to work for the lifestyle you envision. This typically will empower you to better understand where you have opportunity to influence the outcome.
What is the third step?
Planning is the third step. Businesses do frequent business plans and update them regularly. So should individuals. As your circumstances change, your plan needs to change. If your lifestyle goals change, then your number will change. Focus on your goals and then regularly reassess what you need to do to accomplish them. For example, you should have a plan for your career and be purposeful about taking the necessary steps to move toward your goal.
Effectively running a business requires having a vision and making plans to get there. If you are the CEO of a company, people look to you to answer, ‘What are we about? What is most important for us to do or think about?’ In the same way, you are the CEO of your life. Successful people have goals and they are clear about their priorities. Whether it is accumulating money, preparing your kids for what is ahead, reflecting your faith in how you live your life, or creating the next world-changing widget, your actions need to reflect your choices for you to accomplish what is important to you.
As with a business, there are certain elements you need to take care of. You need an income. You need to keep your expenses below your income so you’ll have a ‘profit’ and can invest in your future. Debt can be useful as long as it’s manageable. You need to consider what could go wrong and arrange for that through insurance, financial reserves or that earthquake kit. You need to do what you can to keep taxes low. You need to prepare for the unthinkable with a caring estate plan (in business, a ‘succession plan’). Ideally, you’ll leave behind a legacy of stories about who you are and what is important to you so the culture of the family can continue, if need be, without you.
Once you’ve determined your plan, how do you communicate it?
When running a business, you do marketing to tell the world about your products and get them to buy. But it also helps employees. It reminds them of the business’s values, their purpose and how they benefit customers, and gives them a reason to be dedicated.
In a family, communicating those things and telling the story is as important as it is in business. Reminding family members why family is important and how you value it gives them a common ground to rally around. The opportunity for communication that owners exercise in their businesses is too often left behind in the family experience, where it could be equally valuable, if not more so.
Norman M. Boone is founder and president of Mosaic Financial Partners Inc. Reach him at (415) 788-1951 or firstname.lastname@example.org.
Insights Wealth Management & Family Business Consulting is brought to you by Mosaic Financial Partners