DOES YOUR BUSINESS EXIT PLAN INCLUDE A LIQUIDITY STRATEGY?
Jerry Learns Cash is King When He Starts His Business Exit Plan
Jerry does not have a Business Exit Plan that includes a liquidity strategy. Jerry has run his dry cleaning business successfully for the last 40 years. It has not made him rich, but it has provided a high five figure income that pays the mortgage, car payments and other expenses and left a little over to create a small retirement fund.
Jerry is now 66 and looking to retire. He schedules a meeting with his Attorney and his financial advisor.to discuss his Business Exit Plan. Jerry is advised that he will have to reduce his standard of living to 55% of what it currently is to survive on his retirement cash flow. Jerry is depressed and bemoans the fact that he may have to work in his business another ten years before his cash flow will be sufficient to meet his retirement needs. Jerry is another example of a business owner who failed to plan, and therefore, is now facing a liquidity problem when he is ready to exit his business.
Jerry is Faced With No Business Exit Plan to Be Fair and Equal to all His Children
Further, after his meeting with his Attorney, Jerry learns that if he died today, he will own a large amount in estate taxes which will have to be paid from his estate before his heirs get anything. Now his Attorney piles on and ask Jerry what his plan is to pass on his business to his son Scott who has worked in the business with Jerry. It gets worse, Jerry’s attorney asks him how he plans to be fair to his four daughters who have no interest in the business. The daughters are not interested in the business, but if Jerry is leaving the business to Scott, they want what they consider equal value, and they want it in cash, not shares in the business.
Jerry could have avoided some of or all the cash flow problem if he had started early to develop his Business Exit Plan. There are business succession planning strategies designed to reduce cash needs and still treat all children fairly. By failing to visit an Oregon Business Succession Planning attorney eight to ten years ago, Jerry may now have to sell his business assets at fire sale prices to raise cash.
Most Closely Held Business Owners Face a Liquidity Problem to Address as Part of Their Business Exit Plan
Liquidity, or lack thereof, is a special concern that should be addressed in your business exit plan. With your personal investments, if you are not liquid you will have to sell personally owned stocks to raise cash. It may occur at a time when stocks are down and you should be holding out for an increase in value. Similarly, when you are ready to exit your business you don’t want to have a fire sale to raise cash to pay debts, transfer value to family members or pay taxes.
If you are in the baby boomer generation and exiting your business at or near retirement age, you must coordinate your closely held business exit plan and have a liquidity plan to exit your business, but also to pay debts, pay probate or trust administration expenses, fund gifts to your heirs, pay last illness and funeral expenses, and to pay income and estate taxes. Only through implementation of business succession strategies can the need for cash be reduced and family members satisfied.
Where is the Money Going to Come From to Create the Liquidity to Implement Your Business Exit Plan?
Closely held business succession strategies combined with estate planning strategies for the owner of a closely held business include special IRS valuation rules to reduce the value of real estate, extended payment options for estate tax payment, and use of corporate funds through redemptions, use of buy-sell agreements that are fully funded, private annuities and grantor trusts, self-cancelling installment notes, and recapitalization. Through a Business Exit Plan you can not only solve the liquidity problem, but protect your assets. These techniques are complex and should not be done without advice from a Business Succession Planning Attorney.
Start Your Business Succession Planning Early to Avoid the Liquidity Problem
Protecting your assets and planning your closely held business succession requires application of business succession and tax planning strategies, and management and family transition techniques. If you want to look at your options to develop a business succession plan and estate plan to avoid ownership and control disputes among owners or family, an Oregon Business Succession and Estate Planning Attorney can help. Contact a Business Succession and Estate Planning attorney by contacting Pike Professional Legal Services in Salem, Beaverton or the Willamette Valley, Oregon at 503.888.0952 to set an initial FREE CONSULTATION.
For more information on Estate Planning and Business Succession Planning Russ Pike has written a book to provide you with a knowledge of the basics of estate planning. You can purchase a copy my book, Wills, Trusts and Estate Planning-Your Final Act of Love by clicking here.