Key insights
- As a business owner, you might be overlooking the importance of planning for an exit strategy while focusing on daily operations — but prioritizing retirement and estate planning can facilitate a smooth transition into your next phase of life.
- Building wealth in a personal retirement plan can provide financial security and protect against bankruptcy.
- A comprehensive estate plan safeguards the welfare of you, your family, and your business during your lifetime and beyond.
Need help preparing an exit strategy?
Retirement planning is about creating options, not choosing options. And that’s even more important for owners planning to transition or sell their business someday.
By integrating retirement planning and business exit strategies — and starting to plan early — you can leave your business with the financial resources you need to help secure your financial future.
Plan for retirement with business transition in mind
Business owners often say making regular contributions to a retirement plan is one of the best decisions they ever made. Compounding is a powerful tool over time. A well-funded retirement account can help bridge the gap between the amount you need to retire and the after-tax proceeds from selling your business.
Regardless of your situation, personal financial planning can provide much needed clarity on the timing and value needed for a business sale. While it’s ideal to begin these conversations seven to ten years prior to a business exit, it’s never too late to develop a plan. Surround yourself with a team, working with your legal, tax, and financial advisors.
If you haven’t been saving your money in a personal retirement plan, consider creating one and maximizing contributions. Not only can a retirement account offer a break on present or future taxation, but it may allow you to shelter assets from creditors. Watch our owner legacy webinar series for more tips.
Consider how taxes could impact your business exit
While it’s always a good idea to take advantage of the tax savings and retirement planning opportunities provided by tax-deferred plans, you may be closer to retirement and plan on using your business as part of your retirement plan.
Implement these action items if you plan to transition out of the business:
- Follow effective business succession strategies to increase the likelihood of a seamless transition.
- Consider the extent to which you would like to remain involved in the business following a transfer of ownership. For example, some owners serve as a consultant or employee following a business sale, which can provide a predictable income stream for the first few years post-sale.
- Determine how to structure the transition of ownership (e.g., a sale of the business to a family member, key employee, or an unrelated third party) and consider the tax consequences of the sale.
If you plan to sell your business, be aware that a liquidation or business transition event may generate significant taxable gains. Consult your tax advisor before contracting for sale so they can advise on the structure of the deal and help project the tax impact. Advanced planning can help reduce those gains.
Make estate planning part of your exit strategy
Estate planning allows you to get your affairs in order for the protection and welfare of you, your family, and your business. Generally, business owners with higher net worth and more complex asset holdings benefit from more advanced estate planning, but there may be circumstances where basic estate planning documents are appropriate for you.
If you have estate tax exposure, estate planning can also result in significantly more wealth for your heirs in the form of estate tax savings. The earlier you start planning, the better.
Go beyond retirement planning to secure your financial future
- Proactive planning: Early and thoughtful planning about your retirement and estate potentially enables better financial outcomes. Take time to anticipate your short- and long-term needs during succession events to help anticipate any necessary background preparations.
- Tax considerations: Evaluate the tax implications of transferring wealth, as transfer taxes can significantly reduce the value passed on to heirs.
- Using trusts: Consider various trust vehicles to help reduce tax burdens and shift asset appreciation outside of your taxable estate.
- Regular reviews: Continuously assess your financial plans and estate documents to adapt to changing laws and personal circumstances.
- Flexibility in retirement planning: Make sure you have enough resources for your own retirement before transferring assets to family trusts — and maintain flexibility in case of unforeseen circumstances.
- Management succession: Establish a robust management succession plan to keep your business operational and valuable after ownership changes.
How CLA can help with business exit planning
Business owners often concentrate solely on day-to-day operations and growth. While these are critical, they don’t help you create an exit plan or path away from the business and into the next phase of your life.
Combining retirement and estate planning with your business exit strategy can help support your financial security, facilitate a smooth transfer of assets to your heirs, and protect the legacy you've built over the years.
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