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Retirement in your future? Groom your successor now

handoverBy Jill Metlin   

Are you guilty of this fatal retirement-planning flaw? You believe that after pouring a lifetime of sweat, time, and capital into building your business, you will be able to sell out someday for a ton of money, and then settle back and enjoy a financially secure retirement.

Many business owners are so sure this will happen that they don’t bother to make any other retirement plans.

Who is this person who, at just the right moment, is going to show up with cash in hand to buy the company— and pay a fair price? For thousands of small business owners each year, no one steps forward. The reasons vary: Some businesses are too specialized or are tied too closely to the owner’s unique personality and skills. In other situations, possible buyers equate “retirement sale” with “distress sale” and make only low-ball offers. Whatever the reason, many owners find that their company has suddenly become a white elephant that nobody wants.

One possible solution

A good solution is right in front of you: Groom your own replacement, someone who will buy your company when you are ready to retire. This person may be a current co-owner (but be careful if he or she is about the same age as you and will be counting on retiring around the same time). Or, it could be a son or daughter active in the business, or a younger key employee.

Business owners who successfully groom their own replacements leave nothing to chance. They realize there is no room for error at the point of retirement.

If you want to take chance out of the sale of your business, here are some steps to take:

• Be cautious. Make sure your heir apparent is the right person in terms of temperament, personality, competence, and personal goals.

• Set up a probation period. This is time frame in which you can terminate the relationship if you find the person simply will not work out. During that period, keep everything informal, strictly verbal.

• Include a termination provision. When you go to a formal agreement, make sure it contains a termination provision.

• Use ‘gold handcuffs.’ Weave golden handcuffs and incentives into the contract to ensure that your replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership prior to their retirement. This provides both parties with something to win by sticking to the agreement—and something to lose if it falls apart.

• Put it in writing. Get the help of an attorney to spell out who does and gets what, all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.

• Build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the plan. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money.

These options may work, but they leave much to chance. Instead, consider a funding vehicle that protects your family in the event of your disability or premature death, such as life and disability income insurance.*

• Have a back-up plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times, or your successor dies, becomes disabled, or—all too common—leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it’s simply best to dismantle the business.

Whether or not you have a possible successor for your company, you should begin mapping out your exit strategy today. Your insurance professional, business consultants and trusted CPAs and attorneys may be able to help you develop this kind of business strategy. Do you homework early and avoid any unexpected fallout from pitfalls along the way.

Jill Metlin

Jill Metlin

Jill Metlin, LUTCF, MS (www.jillmetlin.com) is a financial services professional and New York Life Insurance Company agent, offering securities through NYLIFE Securities LLC (member FINRA/SIPC). She can be contacted at 904-997-3074 or jmetlin@ft.newyorklife.com.


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