Consider this; you have worked hard your entire life to start, own and operate a successful and thriving business. You and your partners have spent endless hours of your time working towards building something that will last. Sounds pretty great huh? For some it’s the American dream. The problem is; that dream of continued growth and success for your business can quickly turn sour if you aren’t prepared. Think about it. If you own a car or a house and you die, a month later both your car and your house are valued roughly the same. But what if you now own a restaurant that doesn’t open for a month? Is your business worth the same at the end of that month? As a financial professional it is your job to ensure that you can help clients navigate these often complicated questions and protect one of their most precious assets.
SO WHAT IS THE REAL PROBLEM?
You might think that the death of an individual from a successful business wouldn’t impact things so heavily. What if the surviving family members aren’t capable of stepping in? Is the business protected from losing that “Key employee”? Even worse, what happens when the parties involved have differing views on how things should be handled? Surviving owners and heirs of the deceased owners inherently want different things. The family wants top dollar for their interests and the surviving owner wants little to no interference from the decedent’s family. The one thing they can both agree on is a prompt resolution with little to no added stress if possible. But how?
FIRST THINGS FIRST:
How do business owners make sure that things keep running smoothly should the worst happen? Well by now you know it starts by being prepared. Knowing how much the business could potentially be worth over time and knowing how the business would afford to continue operating is a good place to start. Your client may think they have an idea of what their business is worth but you will certainly want them to consider some of the more important factors of valuation before moving forward with a plan. The nature and history of the business, the economic outlook of the industry, as well as the earning capacity of the business should all be considered. The more educated the clients become the more apt they are to take action to protect all their hard work.
SO NOW WHAT?
Now that you have a good idea of what your clients business may be worth in the future, you can start to talk about what type of options are available to the owners. You may want to discuss the different types of business organizations to help the client understand that they may need a specific type of agreement to suit their particular scenario and to help avoid taxation where possible. Once you know what category you fall under, you can evaluate how the business will afford to continue operations should an owner pass away. It is vital to make sure the funding mechanism keeps pace with the value of the business. If funds are not available to buy out the heirs of a deceased partner, it may put a severe strain on an otherwise healthy business, causing it ultimately collapse. That being said, there are basically four ways that you can cover this need; Cash, Loans, sinking funds and insurance. Typically the life insurance option will have the lowest cost per dollar of the four options but may not be the best depending on the individual business.
TIME TO CALL IT QUITS
Starting and running a successful business takes drive, energy and a lot of hard work. Then at some point, every entrepreneur begins to think about exiting the business and moving onto retirement and other pursuits. After all, people don’t want work that hard for nothing. Business owners do all this to be able to live comfortably off of the fruits of their labor. Realizing that dream, however, can be harder than starting the business in the first place and takes its own unique strategy. First off, retirement can’t happen if the business still needs the owner for day to day operations. For the smoother transition, consider transferring ownership over a period of time. This can minimize potential conflicts that would disrupt the daily operations and allow for the natural adjustment period. The other aspects of presale planning can include anything from making sure the business books and records are in order to making sure that tax fillings are current. Sell the business with the lowest possible risk to the new by making sure all employee benefits are current and paid and that business debt is at a minimum. All of this is done in an effort to add significant value to a potential buyer.
HOW TO MAKE A DIFFERENCE
The common theme with all these challenges is that the business owner must address each one, but may or may not know what is involved for each. Here at Advisys we enable financial professionals to quickly and easily build a presentation that makes you the expert on all the questions your business owning clients may have. If you would like to learn more about how Advisys can help you work with more small business owners in you area visit our website and see