When it comes time to step away from a company they built, many business owners focus on the numbers – what the business can sell for, how to avoid paying too much tax or how much money they’ll have to retire with.
Those are all important factors, but there’s one crucial element that’s often overlooked – whether they, themselves, are really ready to retire.
How will you handle being retired?
The psychological and emotional toll of retirement weighs heavily on the minds of people who’ve worked all their lives to build a company they must now transition to someone else. Some owners find it difficult to let go, or worry that the business won’t do as well without them because the new head won’t have the same relationships with clients as they did. Others worry about what they’ll do with their time once they step aside. Regardless of where the worry is coming from, it’s important to do some soul searching and think about how you’ll handle this transition, and who can help make it easier.
Who will take over?
Family businesses often get passed down to the next generation, but what happens if you don’t have children, or your children aren’t interested in taking over? You need to think about whom you’d like to take control, and whether that handover will happen through succession planning, an outright sale or something in between. Perhaps you can find someone internally who, while not a family member, is qualified to lead and shares your vision. Maybe you have a son or daughter who wants to take over but needs a bit of coaching. Firms that handle the financial details of business succession tend to offer a team of accountants, lawyers and business valuators, as well as coaches or other professionals who can help with the mental and emotional side of the change.
How soon do you want to retire?
You may be ready to cash out or even get approached by a buyer, but the process of selling takes time, so you can’t just sign a deal and run. It can take as long as five years to fully remove yourself from your company – and even longer if the new owners want you to stay on to help with the transition as part of the deal. Your business may also not be ready to sell when you are – finances may not be in order, tax planning may be required, or you may even have to work to boost profits to become an attractive target. Once you sell, the deal may include contingency payments, which means you won’t get all your cash up front. You have to take the time to plan ahead and figure out what your finances will look like under various deal options and how you’ll fund your lifestyle until the transition is complete.
How will you manage the tax hit of a sale?
How much tax you pay upon the sale of your company will depend on what the company is valued at. You’ll need to have a professional complete a valuation of your business before you sell so you know what to expect, and so you can make a plan to minimize the amount of tax you pay. Individuals are eligible for a capital gains tax exemption, but that individual exemption can be applied to more than one family member if you have (or create) the right structure. You can also look to insurance products or charity to lower your burden. If you’re going to pay that money out in taxes anyway, you may prefer to donate it to a favourite charity. The donation won’t be taxed, and can even be used to set up your own foundation, creating a retirement project for business owners who aren’t ready to hang up their work boots just yet.
Whatever your plan, you need to take a holistic approach and consider the personal, family, financial and tax implications of the choice you’re about to make. A sale may not always be the ideal option, but if you’re ready to retire or move on, some kind of transition will be involved, and the sooner you start planning for it, the better off you’ll be.
