Saul Simon

Many small-business owners are so busy running their companies they rarely give much thought to the day when they’ll move on to something else—be it retirement or another venture. <br />

But a long-term capital strategy can lay the groundwork for that eventuality. It lets you draw equity from your company to diversify assets and meet future needs, while transferring and maintaining the financial strength of the business. <br />

“Small-business owners are tactical versus strategic thinkers who tend to get mired down in day-to-day operations,” says Dan Prisciotta, CFP®, CPA*, PFS, ChFC, Managing Partner of Rochelle Park, N.J.-based Equity Strategies Group, affiliated with Lincoln Financial Advisors Corp.<br />

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<strong> Drawing On Equity </strong><br />

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To prepare for the future, Prisciotta suggests that business owners draw equity from their companies to help meet long-term asset diversification and financial needs. Most owners have 80% to 90% of their personal wealth locked inside the equity of a closely held company, he says. “They might be rich on paper, but they may still feel cash poor. If it’s a mature company, they should be tapping into that equity and also have an exit strategy for whenever that time comes.” <br />

The challenge in drawing equity from a company is maintaining its financial vitality so the business can continue to grow and finance retirement and incentive plans for owners and key employees. These programs are often as much a factor in a company’s value as its profitability.<br />

To build value, Prisciotta often helps small-business owners develop “golden handcuffs,” such as nonqualified deferred-compensation plans, to creatively reward select employees. For example, they might provide longevity bonuses of up to $75,000 a year post-retirement to key employees who stay on to age 65. Unlike a 401(k), which must be offered to all employees, owners can pick and choose who will be covered by these more lucrative plans.<br />

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Taking Stock</strong> <br />

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When considering long-term capital needs, Prisciotta suggests that business owners do the following: <br />

<strong>· </strong>   Take inventory of personal assets and liabilities, income sources and expenses. “This means taking stock of what you have, what you owe, where the money is coming in from, and where’s it going,” he says. <br />

<strong>·</strong>    Get a formal business valuation to know what your business is worth. <br />

<strong>·</strong>    Draw up a succession plan. Ask yourself if you want to transfer your business to partners, family members, employees or to outside parties. <br />

<strong>·</strong>    Plan a target date to leave your business. For example, would it be three, five or 10 years down the road? <br />

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<strong> Exiting Gracefully</strong> <br />

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Prisciotta says he has encountered many small-business owners who didn’t have comprehensive exit strategies for transferring ownership, or they had outdated plans that failed to address tax law changes. “They typically reach out to their business advisors only when there’s a crisis or deadline, like when it’s April 15 and they have to file taxes,” he explains.<br />

To help make a smooth exit, Prisciotta helps business owners develop buy-sell agreements that are especially important when there are multiple owners. These agreements outline detailed succession plans should a business owner retire, become disabled, die or get divorced.<br />

“Everyone will exit their business voluntarily or otherwise, vertically or horizontally,” Prisciotta says. “The question is, are you going to do it on your terms, or is it going to happen as a result of some catastrophic event?”<br />

An estimated seven out of 10 owners of small- and medium-sized businesses intend to exit their businesses within the next 10 years (Valuation Insights and Perspectives, September 22, 2006). With the increasing number of baby boomers in the United States, that means many will have 25 years or more of life still ahead of them, for which they should be planning now.<br />

“Exiting a business is often the biggest event in an owner’s life,” Prisciotta adds. “You want to get it right because you only have one shot at it. And if you do it right, you’ll be able to reap the benefits of your life’s work and retire in style.”<br />

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Talk to Your Financial Planner About: </strong><br />

<strong>· </strong>   Your financial goals for after you exit your business or retire. <br />

<strong>· </strong>   How diversifying your assets can help with your life post-retirement. <br />

<strong>· </strong>   How buy-sell agreements can help in executing your plans. <br />

*Licensed, not practicing.