Position Your Business for Success with Advice from Fee Only Financial Advisors
As a business owner, you support your family through the profits from your business. If something happened to you, it would affect your business and the people who rely on you. Advice from fee only financial advisors can help you position your business for success as you plan for your business and your family.
Update Ownership Agreements Regularly
Chances are, you created the ownership agreements early in the life of your business. Over time, as the business evolved, those agreements might be out of date. Most commonly, the ownership agreement that doesn’t naturally evolve with your business is the Buy-Sell Agreement. An outdated Buy-Sell Agreement can be worse than no agreement at all.
These two typical examples show how an outdated ownership agreement can harm a business and the owner’s family.
Example #1 – Sole Owner of the Business
Alex was the owner of a construction company. Every year, his salary of $250,000 supported his family, with health benefits and some other perks. Then, he had a heart attack and died.
He created a plan for the business when he started 25 years ago as part of his estate plan, naming his wife as the owner if something happened to him. At that time, he did not even create a Buy-Sell Agreement because there was nobody who could buy him out. So, leaving the business to his wife was the best option. His wife was unwilling to run the business, so she immediately called in fee only financial advisors, asking them what to do and to help her sell.
The company’s key employees quickly started looking for new jobs and then quit. Revenue crashed, and the bank called in the company debts. No buyer could be found, so she liquidated it for $275,000. Once she repaid the debts, she had $100,000, no health insurance, and no income.
This business owner put his wife in an impossible situation. Because he failed to update the plans over time, his wife was left stranded.
Example #2 – Co-Owned Business
Amanda and Jade co-owned a distribution business, appraised at $5 million. They each took home a $375,000 annual salary. Their 5-year-old Buy-Sell Agreement said that the survivor would purchase the rest of the ownership if one of them died.
Amanda died suddenly in a car crash. As 50/50 owners, they had a life insurance policy on each other. So, Jade used the insurance payout to buy the other half of the business.
But the $2.5 million lump sum didn’t keep up Amanda’s family’s lifestyle. Instead of a $375,000 annual salary, their income fell to $100,000 a year, based on withdrawing 4% of the critical asset’s value every year. Although the Buy-Sell Agreement worked out as they planned, the family still suffered.
If your family relies on your business for income to maintain their lifestyle, consider the consequences of an untimely departure. Keep ownership agreements up to date to protect yourself, the business and your family against the unexpected.
Example #3 – Planning for Children
Fairness is not Always Equality. With children, planning gets even more complicated.
Dave has 3 children: Steve, Jon, and April. April worked in the business for 2 decades, helping it grow from $1M a year to $15M. When Dave approached retirement, he planned to transfer the ownership to April and leave a $1M inheritance for Steve and Jon after his death.
When the brothers discovered the value of the business, they demanded equal cash payments from their father. They felt it wasn’t fair that April received more, even though the company was mostly illiquid, and they never contributed to its success.
It is critical to communicate with your children in situations like these. How do you determine what’s fair if it isn’t equal? How will ownership or cash transfers reflect their contributions? Equality is not the same as fairness.
Your Chosen Successor
Determine if your chosen successor can (and will) continue operating and growing the business. Implement incentive plans and reward potential successors with high performing results.
Advice from fee only financial advisors helps plan for a successful future for your business and your family. Reach out today.