Most Americans prepare for retirement in a similar manner. They build up some sort of Social Security or pension benefit, then save to help supplement any shortfall. Of course not all Americans follow that pattern, business owners least of all.
Business owners are constantly sacrificing potential savings to invest in their businesses. Many do so with the hope that their business will somehow provide for them during retirement. Converting a business to retirement cash can be complicated.
All business owners should make saving for retirement a priority, but for many that just isn’t possible. Sometimes keeping a business alive allows little room for saving.
One of the biggest problems many small-business owners face is the “all-star” problem. In other words they perform tasks their employees can’t. This means if the business owner is gone the business will wither and maybe even die.
If the role a business owner plays can’t be duplicated, life insurance is essential to care for beneficiaries. Such a business owner also has to make saving a priority or risk working into the golden years.
Some businesses are more portable. This means the business owner isn’t needed for the day-to-day operations. These types of businesses are easier to sell or convert into an income stream. Such a business owner can groom a replacement or find an outside buyer.
Things get a little more complicated when the business is owned by a partnership. A good partnership should have an exit strategy for retiring partners. Partnerships can usually survive the death of an owner, but this doesn’t mean beneficiaries always get what they deserve. There is an insurance strategy called a cross-purchase plan that is useful in these situations.
In a cross-purchase plan, either the business or partners buy life insurance policies on the other owners. If an owner dies, the life insurance proceeds are paid to the deceased’s beneficiaries. The downside of a cross-purchase plan is the value of the business can constantly change; insurance policies usually aren’t as fluid. An old cross-purchase plan may leave beneficiaries shortchanged.
A business that is sold in a single transaction can lead to a large tax bill. Other options like an installment sale may be better in the long run. Uncle Sam can be generous to small-business owners. They usually have deductions that aren’t available to employees and the available retirement plan options are also much broader.
Whatever strategy is used should be sealed with a contract. Gone are the days when transactions could be sealed with a handshake. Rely on attorneys, accountants and any other professional as needed.
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For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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