Every business owner knows that one day they will exit their business either on their own accord or involuntarily. However, many fail to properly prepare for their departure. One issue that every business owner should address as part of their exit strategy is how to maintain their current standard of living upon exiting their enterprise.
Early in the exit planning process it is important to develop a contingency plan for the business and assemble a team of advisers who can help identify strategies to meet your personal financial goals.
“The cost of hiring a team of experts is typically recovered several times over through the benefit of the increased selling price of your business and maximum personal financial security,” says Sandro Rossini, senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank.
Smart Business spoke with Rossini about how business owners can most effectively transition into a comfortable retirement, the importance of having a customized financial plan in place and what type of service and performance standards one should expect from investment professionals.
What’s the first piece of advice you would give to founding owners about exiting their business?
The first step is to determine who is going to run the company upon the founder’s death, disability or retirement. If a decision is made to exit the business, the founder must decide between liquidating the business, selling the business to a non-family member or maintaining ownership of the business within his or her family. One-third of businesses don’t get passed along to the second generation. If you want the business to remain in the family it is important to evaluate the capabilities and interest of your children. This process can never be started too early.
How can a business owner most effectively transition into a comfortable retirement?
Just as an owner might hire a team of professional advisers, such as engineers, attorneys and CPAs, to build a successful business, it is important to hire a team of professionals to build a solid personal financial plan. The first step is choosing a financial planner.
Upon exiting a business, why is it so important to have a customized financial plan in place?
The main reason is so that you can maintain your standard of living. By having a plan in place, financial strategies can be developed to establish cash flow and reduce the tax impact of the sale of your business. It is critical to develop a customized financial plan because everyone’s financial circumstances are different. One person might have all of his net worth tied up in his business, with no other assets to speak of, while another person might have significant assets outside of her business. A certified financial planner can help you customize your plan so it meets your specific objectives.
Why is it important to get outside help when planning a financial strategy?
Switching from earned income to investment income is a whole new way of living. You are shifting expenses, such as for cars, travel and entertainment, from corporate expenses to personal expenses. This requires a complete evaluation. Working with a business broker, business attorney, CPA, financial planner and investment adviser should be part of your strategy.
What type of service and performance standards should one expect from investment professionals?
It is best to start with an evaluation of all your options with multiple professionals. Getting a referral from a trusted colleague that has gone through a business sale is always a good way to start. You should expect the planning process to be intense and require multiple meetings. All of the professionals you are working with should provide you with plenty of attention and be thoroughly committed to meeting your needs.
It is important to understand the compensation structure of the individuals with which you are working. For example, many stockbrokers carry the certified financial planner, or CFP, designation but are compensated only when you purchase a product from them, whereas other certified financial planners charge a fee and may not have the incentive to sell you a particular product. Part of setting your performance standards involves understanding what motivates your team.
SANDRO ROSSINI is senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. Reach him at (415) 477-3212 or email@example.com.