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5 Mistakes Business Owners Make That Can Lead to Retirement Trouble

As the owner of a business, the day-to-day responsibilities of providing high quality service to customers, overseeing corporate strategy, developing high quality employees, and keeping up with changing markets consume most of your time. As typically the largest asset in your net worth, the work you put into increasing the value and marketability of your business is often an afterthought until a trigger event (e.g., health issue or death of a close friend) forces you to reconsider. 

At Stratus, we believe that being proactive with your succession planning is much better than reacting to an unexpected event. Therefore, we want to share with you the five most common mistakes we see in our succession planning work with independent business owners like you.

1. Not Knowing the Value of Your Business: Most business owners think their business is worth more than it is to an objective, third-party observer. Because the business is oftentimes the owner's largest asset, not having a clear picture of what the business is worth makes planning for a secure retirement almost impossible. Therefore, the best advice for business owners is to get a third-party valuation of the business at least 3-5 years before they would ideally retire. Knowing where you stand not only makes planning easier, but it allows the owners to implement strategies for increasing the value of their business prior to an exit.

2. Not Diversifying Wealth: Regardless of the value of the business, most owners will have the vast majority of their net worth tied up in their business – a highly illiquid asset. Therefore, a business owner should diversify their net worth by using more liquid options such as company 401(k)s and cash balance plans to maximize the amount they are shielding from taxes while they work on preparing their business for sale.

3. Not Reviewing Legal Documents: Most legal documents cover death but oftentimes miss one or more of the following trigger events: disability, divorce, personal bankruptcy, termination, and retirement. Business owners need to review their legal documents with their advisors every 2-3 years or when a material event occurs (e.g., spouse diagnosed with dementia) so that updates can be made that reflect the current goals and needs of the owner and his/her family. This is true for both professional documents (e.g., Operating Agreements, Stock Purchase Agreements, etc.) and personal documents (e.g., wills, trusts, etc.). These documents never seem that critical until they are, and at that point they become paramount to the protection of the owner's family and legacy.

4. Not Considering Every Ownership Transfer Option: A key piece of any business owner's retirement plan is the sale of the business. Therefore, it is critical that an owner considers every option available for creating a market for their shares or ownership interest. Most owners have thought about a sale to a family member or to a strategic competitor, but what about to their employees through an Employee Stock Ownership Plan (ESOP) or Worker-Owned Cooperative? Knowing all your options allows a business owner to consider the best avenue for creating a successful exit for the three key stakeholders: the owner and their family, the incoming owner(s), and the loyal employees and customers.

5. Not Planning for Taxes: Every business owner would enjoy getting a check for millions of dollars, but if they haven't planned for the tax consequences, they could end up paying 40% or more of the gross sale value in taxes. Therefore, assembling a team of qualified professionals who know the owner's business and industry, the owner's goals, and the tax consequences of each ownership transition option can help the owner keep more of the value they have created over their lifetime once all taxes and fees have been paid.

Many owners don’t start the succession planning process early enough because it adds another complicated task to an already overwhelming list. Our goal at Stratus is to work with you to quarterback your succession planning process so you can focus on running your business while we focus on securing your post-ownership goals.

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