Published in Finance

Early financial planning smooths path for company succession

BY Sunday, March 29, 2020 04:33pm

Experts say many business owners don’t plan for their eventual exit until they are ready to leave or have begun to see the day they depart.

Even fewer take steps over the years leading up to that point to make sure their personal finances are planned out and in good order so they can carry on with their lifestyle after their exit.

Personal financial planning by business owners occurs “usually not soon enough,” said Jeff Williams, a senior financial adviser and managing principal at Grand Wealth Management LLC in Grand Rapids.

“A majority of business owners tend to focus the vast majority of their resources on the business and not as much on their personal finances,” Williams said. “Some do good planning, but I’d say a lot of business owners are totally focused on the business, put everything they have into the business and neglect the personal side of planning.”

Quite often, that’s because they’re more devoted to building and running the business, rather than personal financial planning for the future, and have linked so much of their net worth to the company.

Profits from the company are “just plowed back into the business and the thought is oftentimes that the business owner can make more money reinvesting in the business than they can outside the business,” Williams said.

Just as business owners should plan well ahead for the eventual transition of their companies to a new owner or succession to different leadership, they need to keep their personal finances in mind at the same time.

“For many business owners, the business is their life’s work. It’s generally their biggest asset, it’s their livelihood. It’s generally their best-performing investment, and so it is generally what they love to do,” he said. “A lot of business owners spend a lot of their energy on the business, put profits back into the business and nurture the business, and don’t always do the type of planning they should be doing for the eventual transition of the business. 

“A best practice would be to separate the business finances from the personal finances. Treat the business as a business. A successful business should be profitable and an owner should be taking profits from the business and create some level of financial independence from the business.”

Finding the time to plan

All business owners need a well-developed personal financial plan that’s separate from their business, said Doug Bajor, a senior wealth management adviser at Greenleaf Trust in Kalamazoo.

Personal financial planning should “go hand in hand” with business planning, Bajor said. Even if the company records steady profits and their net worth grows because of their holdings in the business, personal financial planning by owners “will be secondary,” he said.

Bajor estimates that one-third to one-half of business owners “have really developed a clear strategy, number one, for the company and, number two, have a pretty good handle on their overall net worth.”

“They may have pockets of investments through different advisers, spread over a number of different firms, yet they don’t have a really good, clear picture for it,” he said. “It’s easy to get caught up in the energy of the day and the challenges of the day, but it’s good to bring them back into the fold (to focus on) different issues that may come to affect them, what are their broader goals and their longer goals, and to take a more positive focus on it.”

Future focused

Through good financial planning, when the time comes to sell, owners will have better positioned themselves personally for the future. They won’t have to rely solely on the proceeds they make from the transaction, giving them greater flexibility in selecting a buyer if they place a high value on what happens to the business and their legacy after the sale.

As well, if owners lack a well-developed personal financial plan and have not positioned themselves well personally for the future, they may set an asking price for the business that’s too much, according to Bajor.

“That can stymie a deal, if there’s a set figure in mind that isn’t going to be realistically attained, either through a financial buyer or a strategic (buyer),” Bajor said. “That can slow the process quite a bit.”

In other cases, an owner may pursue a deal structure and demand terms that limit the pool of prospective buyers, especially if the owner has heavy personal debt, he said.

If all or a majority of an owner’s personal net worth is not tied up in their business, they can “be a little more patient” in seeking a buyer and negotiating a sale, Bajor said.

A strong personal financial plan for an owner after an exit from the business typically involves a mix of stocks and bonds in an investment portfolio, Williams said. A personal financial plan also forces owners to think about what they need to live on once they depart, as well as issues such as transitioning wealth to family and any charitable giving, he said.

Personal financial planning also helps an owner to consider what they want to do after a sale “when they don’t have a business to go to every day,” Williams said.

“Oftentimes, business owners love what they do and they have spent so much time in the business, even knowing how they’re going to spend their time is difficult,” he said.

Read 1217 times Last modified on Friday, 27 March 2020 16:39
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