Friday, September 22, 2006
PUT IT ALL IN WRITING
Once you and your advisors, as well any family members or partners, start discussing your issues for retirement plan, you'll begin to appreciate the need to put it all in writing.
Why in writing? Setting out the key fundamentals and stages of your exit strategy on paper will help give you a clear picture of what needs to be done and when. It's important to have a written plan in circulation, particularly in family-owned businesses, because you will need others' input and it can help avoid disappointment or mis-communication down the road. A written retirement plan should include:
1. Long-term business goals: While this doesn't have to be a developed strategic plan for the business, it should outline how the current ownership and others see the business rising in years to come. This could include a mission statement, a vision for the future, summary of strengths and weaknesses and goals achieve the long-standing strategy.
2. Financial statements & issues: Mainly for family members, candidates and others not common with the operating numbers, this section includes income statements, balance sheets and cash flow statements. The purpose of these reports is to provide a snapshot of your business' assets, liabilities and taxes.
3. Owner's retirement requirements: Include an appraisal of the owner's personal financial situation, showing the amount of investment in the business and income needs in future years. In cases where there is a shortfall in income needs for retirement, the retirement plan needs to outline options to accurate the deficit If the business is funding the owner's retirement, is it through a formal retirement plan, life insurance or payments from future earnings? This section can also address the estate planning needs and strategies to be adopted by the owner. It should also make clear how and when the origin owner will capitalize on the investment in the business; it's important for successors to know the presentation objectives and timing needed.
4. How to recognize and announce a successor: State what types of leadership skills, education levels and other talents the business will need The retirement plan should also outline the method by which candidates will be identified, trained and a successor declared.
5. Ownership and management organization: Particularly in family-owned businesses, it's important for the owner to set out the ownership rights and business responsibilities of key family and employees. As well, the retirement plan needs to speak to the separation of power in the family, voting rights and whether spouses, in-laws or other relatives can hold shares. A new shareholders' agreement may also have to be part of this section of the retirement plan
6. Dangerous path and schedule: A critical path of events is needed, ranging from the close dates of educational requirements for possible successors to the transition date. For example, does the owner have a specific retirement age, such as 65 or 70 years old?
7. Communication plan: Also important in the planning process is deciding on a communication plan for other family, shareholders, employees, customers and professional advisers. The plan can also speak to risk management efforts needed to ensure unexpected events do not complicate the retirement. Other aspects of the written retirement plan, such as legal or tax steps wanted can be hammered out with professional advisors. When the plan is in first-draft form, it should be spread to family members and even employees for comments it’s important to be open to criticism, possibly using the family council sessions to deal with problems.
8. Revising Your Shareholders Arrangement: When creating and implementing your plan, one of the first things your legal advisor will want to address is your shareholders agreement. It's a critical element since it speaks to so many of the core retirement issues, including:
• Partition of ownership, power and share structure
• Roles and responsibilities of shareholders
• Composition of the board and voting rights
• Structure for resolving shareholder disputes
• Options in the event of disability, divorce and other unforeseen conditions
• Buy-sell necessities
In some cases, a retirement plan will require a new shareholders agreement to allow for estate planning, share incentives for successor candidates and non-voting shares for non-active family members.
9. Buy-Sell Agreements: Another important legal document to believe in implementing a retirement plan is the buy-sell agreement. These agreements give liquidity for an estate and business continuity in the event of the death, disability or retirement of an owner. Buy-sell agreements set out terms and conditions for acquiring and selling interests in the business. The price offered must be fair and logical. The other owner also has the right to turn the offer around and want the potential acquirer to sell for the same price. One variation is the "wait and see" buy-sell agreement, where the business itself has the first option to purchase a deceased's interests. Existing shareholders then have the option to purchase any stock not bought by the corporation. The business must finally buy any stock left over. This type of agreement gives the surviving family an option to "wart and see" how money is best taken from the business. Naturally, these agreements have a life insurance component that allows the family to buy the shares or use the policy proceeds to lend money to the company for the purchase.
Speaking Of Insurance...
Not to be forgotten in your retirement plan is the need for sufficient insurance coverage. For example, under a buy-sell agreement, co-owned businesses can use insurance to finance the purchase of a shareholder's interests in the event of death or incapacity. A life insurance policy for right amounts can be purchased for each director so that the proceeds can be used for a quick purchase without straining the business. Also, another option to think is "key person insurance". This type of insurance helps reimburse a business for any financial losses due to the death or long term disability of an essential person. In some cases, key person insurance offers tax compensation.
Key person insurance covers the business, but what about your own earnings? Mainly in cases of short-term disability, the incomes of owners and key employees should be protected. A sudden illness or accident can cause you to be missing from the business for weeks and sometimes months. A disability insurance policy can supply income for the short-term or longer. These days, there are many types of disability defense, ranging from monthly income replacement to coverage for individuals needing long-term care. One of the newest innovations is "critical illness insurance," which pays out a bump sum settlement soon after the diagnosis of a life-threatening illness or disease.
Lining up Financing Options
Whether it's a family member, key employee or third party assuming ownership, establishing some financing options well in advance of the owner's retirement may help make the transition easier. Actually, in family businesses, it's possible to exploit financing techniques to pay out a founding owner before the actual transition date.
Traditional financing options for retirement include:
• Secured loans, based on hard assets
• Subordinated debt, which is used when cash flow is strong
• Equity investments
In many family-owned businesses, hard assets fall short of securing the loan needed to fund the owner's transition. Subordinated debt and equity can often make it happen. Profitable lenders taking on retirement financing usually conduct thorough due assiduousness and review past performance, management expertise, cash flow patterns and earnings. These financing techniques can let a buyout by heirs or others over time to be funded by the business itself. By tax planning techniques such as estate freezes, the owner can begin transferring shares in the business to family before the transition. A second round of subordinated debt over a few years may then help complete the funding of the owner's retirement, with the business making the payments.
Ever more, owners are also looking to a wide diversity of insurance products to finance either retirement-related tax liabilities or even the outright purchase of their interests, as well as protecting a retirement from unexpected events, such as illness.
Life insurance may be paired with a tax planning vehicle, such as a final life insurance trust. Financial and tax advice is needed to ensure the beneficiary is properly stated and to decrease or avoid probate taxes.
Insurance is also useful in helping finance installment payments. The installment sale is an extensively used retirement financing technique. The payments offer a stable stream of retirement income for the owner, as well as some capital gains reward.
Revisit Your Retirement Plan Frequently
With the accurate team of advisors, plenty of internal discussion about your needs and goals, and some think on legal, tax and financing options, you will be well on your way to a winning retirement plan. How long will it take? Practically, it should be an ongoing process that is never complete until you have achieved your goal of a safe exit strategy from the business. Your professional advisors will at first need at least 3-6 months to correctly assess your business and options. In that time and beyond, you may also have to meet feedback from family, board members and others involved with the business. It's not strange for the fundamentals of a retirement plan to come together a year or more later.
Choosing a successor or potential buyer will also take time. A formal search inside and outside the business could be at least six months.As you near retirement or the exit moment, you should resume your plan to ensure it's on track. How do you know if your strategic plan is failing? Here are some signs:
• Inflexible plan that isn't modified to the needs and abilities of the people involved or changing circumstances
• Excessively long timelines for promotions and opportunities, prompting key people to leave anyway
• Poor communication of the plan and a lack of understanding among family and employees of the actions, processes and requirements
• Selection of unmotivated people or people without qualifications
• Breakdown to hold individuals accountable for goals and requirements
Where possible, your outside advisors can be helpful in the training of your successors. They can insert a degree of objectivity that owners may find difficult to maintain. Sometimes the most time-consuming and emotionally difficult aspect of implementing the owner's retirement plan is simply letting go.Most business owners are strong-willed and self-governing. They know what works and it can be difficult for them to leave the business they formed. The owner may have a financial risk in the business and want to remain involved with the operations beyond the retirement date. While comprehensible, this is sometimes awful for your business and your successor. Researchers have found the transition to new ownership and management is most easily achieved when the earlier owners engage themselves with other interests.
In the end, perhaps the most important retirement objective you can set for yourself is to take benefit of the freedom to pursue the other opportunities life can offer.
Tuesday, September 19, 2006
You may be wondering how you can find time to do any retirement planning. You probably can't do it alone and do it well. At one point or another, you may find it supportive to call upon a range of outside experts to help put your plan into action. Your business may not need the full range of expertise out there, but it is worth contacting at least one advisor experienced with small business issues.
Here is the typical listing of experts who may be able to help you create a successful retirement plan:
1. The Accountant
If you have one, your outside accounting firm will be well familiar with your business and, likely, similar operations. Accountants may be able to help you make your business more financially sound and more good-looking to buyers. Your accountant will also collect the financial statements and answer buyer's questions during any due diligence stages. Another reason to consider hiring a chartered accountant or similar professional is to start getting audited financial statements —a valuable asset in the eyes of many buyers. Experts suggest your accountant should also work intimately with your legal advisor to make sure there is no doubling of effort.
2. The Lawyer
Your business may already have a legal advisor who helped incorporate it. That doesn't mean, however, that legal advisor is the one you'll use for your retirement planning. Look for a legal advisor or law firm that specializes in business and land law and has actual experience in selling businesses, drafting shareholder agreements and tax planning.
3. The Tax Advisor
One of the most expensive members of your team will be the tax expert. There are huge potential tax risks, when exiting a business or transferring it to others. Your tax advisor must have a clear understanding of your business and your personal goals. It's important that this person understands both personal and corporate tax issues.
4. The Appraiser / Valuator/
If your business is large, complex or has significant assets, you may need an expert estimate of its value, even if you only plan on transferring it to family. There may be a qualified business valuator in your chartered accounting firm. The valuator will ask for current financial statements and a brief description of your business. Next, you'll likely meet for a few hours to talk about the strengths and weaknesses of the business. The valuator can also use this time to explore what types of potential buyers are out there and what would make your business attractive to them. In some cases, the valuator may be able to recommend steps you can take to increase the value of the business. Some valuators will also help you create documents for prospective buyers, such as growth forecasts.
5. The Banker / Lender /
Your lenders are an important part of your team and can help organize the efforts of other members. A lender experienced with small or medium-sized businesses can offer valuable advice at each step of retirement planning. Your lender may also be important in financing the sale or transfer of your business.
6. The Broker
If you plan to sell your business you may want to consider listing it with a business broker or agent. You can run your own advertisements or approach others you think will be interested, but it is time-consuming for an owner who holds a business close to his mind. Brokers be likely to have a large pool of potential buyers and can discreetly contact competitors, suppliers and major customers. Brokers also can separate those who don't have the financial resources or credentials. Most important, a broker may offer tips and techniques for selling a business that you simply can't get from your other advisors. Brokers usually get a commission tied to the final selling price that can range as high as 10-15%. Experts suggest you insert a clause in the sales agreement that you will pay only when you actually receive the money. As with any one you don't know, ask about recent sales and the names of pleased clients you may contact. You should review the sales agreement with your lawyer to, among other things ensure that it correctly describes the sale.
You want to learn more about Retirement planning? Read the previous article.
Friday, September 15, 2006
What's your exit strategy? If you are like most owners, you don't have one; according to a recent national poll 67% of 430 owners surveyed in 2001 did not have a retirement strategy. Yet, most (55%) calculated personal retirement and succession planning integral to their business' future. For many, their business is crucial to a secure, comfortable retirement.
Do you have a family-owned business? If so, retirement planning is even more important. Most small and medium-sized businesses in Canada and USA are family-owned and surveys propose owners are dedicated to pass a successful venture on to the next generation. Many hope the business will fund their own retirement and the family's fortunes for years to come.
Experience, however, shows there is often little planning or preparation for transferring ownership within families. In fact, 70% of Canadian family-owned businesses do not pass on to a second generation and just one out of 10 move to a third generation.
You should learn how to plan a future for your business and yourself and which steps should be involved in retiring from a business. You should learn also how to ready your family and others for the challenging decisions ahead, and the legal, financial, taxation and even emotional issues you'll need to begin.Think, for example, about what you want from your business. Are you interested in great prosperity? Do you want to make a legacy your family can carry on? Planning to go public or sell out to the highest bidder? Or, is your business simply a way to make a living? Each of these goals calls for a dissimilar set of growth strategies and different retirement plan for each owner.
Separately from figuring out how you should exit, retirement planning also deals with another serious issue for many business leaders — succession. By choice of not, you will someday leave the business. Who will take over for you? Is it someone who knows where to take the business next? Would you or your family be able to draw upon the full value of your hard-earned success?
Making a retirement plan now and fine-tuning it occasionally lets owners begin a process that:
• Protects the full value of their investment
• Generates a potential income stream for retirement or upon disability
• Reduces the tax collision on their estate, their spouse and others
• Creates a smooth management transition with little or no business trouble
• Allows family members or key employees to self-confidently assume ownership
• Enhances the overall worth and strategic direction of the business
Done property, your retirement plan can help you find the best way to finance your personal exit strategy and recover the time and money you've invested in the business. It's also important to understand why you shouldn't do this alone and should try to find out the best outside advisors you can find to enhance your decisions on the many financial, tax and even family challenges.
Still need convincing? Consider the significant personal and strategic benefits that can run from starting your retirement planning now, no matter what life stage your business is at.
THE PERSONAL BENEFITS :
Retirement planning is actually all about you, the owner. At its heart, retirement planning addresses how you can confidently transfer ownership. Every owner's situation is different, but advance planning helps you answer these questions:
• How much income would I need to retire or do something else with my life?
• Do I have a rational exit strategy from the business?
• Would I need to sell the business? How do I find out how much it is worth?
• Do I want an all-cash deal? Would I be ready to finance part of the sale?
• Do I want to be involved in the business, but not day-to-day management?
• Are family members, employees or others interested or prepared to play a better role in the business? Will they need my help?
In many good wishes, a retirement plan is your life strategy. For those with family members, business partners or employees interested a plan can also help with their life strategies and get rid of their doubts. Retirement planning can also be an effective tool for smoothing out family, partnership or management differences. Planning calls for collaboration and long-term thinking about personal needs. The process often reveals differing points of view and agendas on everything from career choices to who is permitted to ownership shares.
What's important for owners to know is that the retirement planning process deserves and requires time to create and realize. With a plan in place, owners can assertively fine-tune and change the plan as time passes to ensure their financial and personal well-being is secure.
THE OPERATIONAL & STRATEGIC BENEFITS :
Retirement plans also offer major benefits for day-to-day operations and the long-term strategy for your business. With planning, you can actually take steps to increase your business' value in the eyes of investors, lenders, suppliers and customers.
Without a plan, particularly effective long-term tax planning and ownership transition agreements, your business can easily be unavailable for many months. A retirement plan can also help disclose operational weaknesses that can be fixed in time to maximize the business' value just as the training of key employees or family members, for example, may become a priority. Not exceptionally, the process may also reveal that the business is not worth as much as originally thought or a different exit strategy is needed to return the owner's investment. For example, what if no one wants to buy the business or no family member is ready or interested in taking over?
Retirement planning is also valuable for its long-term outlook. Typical marketing and strategic plans rarely stretch beyond a year or two, but retirement plans must look many years ahead. It's why some call the retirement plan a "second vision" for your business, asking long-range strategic questions such as:
• What is the future direction of the business?
• What products or services will we sell in 10 or 20 years?
. How will our markets change in that time? What types of people and resources will we need to compete?
• Who are the key people to develop and care for the future?
From a strategic perspective, retirement plans can even command greater respect than other business plans because of the personal stakes concerned. By nature, a retirement plan has the "buy in" of future leaders and they must work with today's owner to ensure it's implemented in the end, strategic advantages often seen with retirement planning include:
• Motivating key employees or family members to seek better training and skill to prepare for future roles
• Aligning the needs of the company with the resources accessible
• Helping the company recruit and retain better people
• Encouraging new ideas to improve internal processes, as well as the businesses outside opportunities
• Descriptive the owner's intentions, helping to reduce disappointment and possible departures of key people
No money to fund your retirement years. No one interested in buying the business. No one ready to take over. If you don't want unpleasant surprises like these, you will want to invest the time and effort now to create your personal and business retirement plan.
Tuesday, September 05, 2006
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