One of the largest risks to the future of a business is one that is often left unnoticed: What will happen when the ownership changes? At some point, a successful business faces this question and considers liquidation for all the right reasons. The business owner has built an asset that is positioned to sell to another individual, a group of investors, or acquired by a large corporation. Or perhaps as the business has grown, planning has revolved around liquidating but the actual liquidation plan isn’t in place.
Whether it is a succession or a liquidation, neither are an overnight event and involve many moving parts and due diligence to be successful. Business liquidation planning should help to transition you emotionally, as well away from the business. Therefore, business liquidation and succession should be tackled sooner than later since the sale is likely to be a large part of your family’s wealth and can impact you financially for years to come.
As your business is about to be sold, factors about income control need be addressed. During the building of your business, you were in full control of decision making and ‘income making.’ Now, business decisions may stop, as well as your ability to make income from the business. Without proper planning, overspending can result, since you may receive a windfall of money for years of hard work. Tax planning must happen even if your sale proceeds will pay over multiple years. No longer will you be able to offset income with business deductions and your income may increase, resulting in a higher personal income tax bracket.
Other factors to consider are defining your role and other key employee’s roles during, and after the sale and if you will receive income during the transition period. Will you maintain control of day to day operations during the transition? All variables of the transaction from start to finish need to be planned out. There should be a lot of planning that goes into what happens after the sale, too. You may maintain control of the business, even if you no longer own it after the liquidation occurs.
Family dynamics, mortality, and money are all topics to consider as part of business succession planning. Is the business transferring to family members, or will the sale affect others in your family? Are the profits from selling intended to provide financially for you for the rest of your life? Will you receive enough profit to maintain a particular lifestyle?
Because there are many types of business succession plans, yours should reflect what is best for YOU. Business succession planning should involve legal and tax professionals, a financial advisor, and an insurance specialist if you plan to use life insurance or an annuity as part of compensation from the sale. If you are an entrepreneur, we recommend planning your exit strategy now, even if you don’t see business liquidation in your immediate future. Your future self will thank you.
*Advisory services offered through Trajan Wealth, L.L.C., an SEC-registered investment adviser.
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