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Thayer Partners Blog

3 Financial Planning Tips for Business Owners

[fa icon="calendar"] Feb 19, 2016, 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

3_Financial_Planning_Tips_for_Business_Owners.jpgEarly and ongoing financial planning is critical to ensuring that business owners like yourself can maximize your business sale value, minimize taxes, and take advantage of all available financial opportunities now and in the future. 

Consider these financial planning tips for business owners.

1. Review Your Retirement Plan Options

Even if you aren’t close to your retirement yet, it still makes good business sense to start thinking about your options and planning for your retirement years. The earlier you plan, the more money you’ll be able to save.

Creating a qualified retirement plan can be an effective way to defer some of your business income and lower your current tax liabilities. Cash Balance plans and Defined Benefit plans can also allow you to save much more pre-tax money than your typical 401K or IRA, leading to maximum retirement savings and a lower tax bill.

2. Review Your Buy-Sell Agreement

A buy-sell review should be the foundation of your regular financial planning process. Your buy-sell agreement is the legal document that details the terms and or process for buying out the interest of a critically ill, retired, departing, or deceased partner.

Many parts of your business evolve over time—new partners come in, your industry might change, the economy might change, or your business might increase or decrease in value. A buy-sell review makes good financial sense, particularly to update your business valuation. Your agreement should reflect the most current status of your company (e.g. new and former owners, increased or decreased value, etc.) in order to ensure that your business and legacy continue to be protected.

3. Plan Your Exit Strategy

Business owners need to plan for the future of their companies. But many of them don’t. In fact, according to Bain Surveying Inc., almost half of middle-market business owners who are aged 55 and older are interested in selling their businesses within the next few years; yet a staggering 90% haven’t initiated the financial planning process to do so. Entrepreneurs focus so much on launching and growing their companies that they often forget to think about what they’re going to do down the road. It’s not enough to build a successful business. You must also ensure that you have an effective exit strategy in order to get all of the money you deserve from the sale of your business. To have a better chance of maximizing the value of your business, you need to have a clear and well thought-out exit strategy—one that was pre-planned and strategized.

You have a few exit plans to consider. You could run a “lifestyle company” where you live off of the cash flows on a daily basis. With this type of strategy, you pay yourself a huge salary, give yourself large bonuses, and live off of the income. You keep things small instead of reinvesting the money into growing your company. However, this type of strategy could have negative tax implications and you could be taking out money that you’ll need later on.

The second option you have is to liquidate. You might decide that enough is enough and call it quits. However, with this strategy, you only get the market value of your company’s hard assets, like equipment and inventory, and you essentially waste all of the hard work you put into building the business: the customer base, training employees, building a brand. These intangible assets are often called “goodwill” and can be quite valuable to a buyer.

Third, you could sell your company to an interested friendly buyer—this could be your children, a key employee, or a manager. This can allow you to keep the business open, but you might leave too much money on the table because the company is being bought by someone you know.

Fourth, you can choose to sell to a third party. This is one of the most common exit strategies, with its unique advantages and disadvantages. You find another business in the same or a related field or an investor that wants to buy yours and you negotiate a selling price. With the right buyer and careful financial planning, you could sell for a great price. However, if you sell rashly at the last minute, you could end up getting far less than the value of your business.

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Topics: Financial Planning

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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