Have you ever wondered:
Am I saving enough to meet my retirement objectives?
Will I have the retirement I'd hoped for?
Will my children have the financial opportunity to continue their education?
Is my estate plan consistent with my current goals?
Done correctly, personal financial planning helps discover and prioritize your objectives while planning and protecting the future of those closest to you. Now more than ever, doing it right requires the services of a sophisticated professional team.
As a business owner, you’ve invested so much into making your business successful – hard work, time, money, energy.
It’s truly hard to imagine your business without you. But chances are there will come a day when someone else will take the reins. And a seamless succession plan, one carefully and thoughtfully devised well in advance, is essential to making sure your business enjoys continued success for generations to come.
The facts are a bit grim. Only 30% of privately held businesses survive into the second generation, and less than 15% survive into the third, according to Nuveen Investments. A well-planned transition strategy can help you avoid this common pitfall.
For many hardworking business owners, succession planning represents the notion they can be replaced – a pretty uncomfortable scenario. Perhaps that explains why only 3% of business owners surveyed for the report "2011 U.S. Trust Insights on Wealth and Worth" had formal succession plans as part of their estate-planning documents.
But just as estate planning helps protect your loved ones and helps assure your wishes are carried out as you intend, a succession plan does the same for your business if for any reason you are no longer there. In short, it safeguards your legacy.
A thorough succession plan considers not only your exit from the business, but also your retirement needs and personal estate. It provides for an orderly transition of management and the passing of control of the business. It also avoids the potential pitfalls of loved ones having to make difficult decisions during stressful times, or leaving the future of your business to happenstance.
And it’s never too early to start thinking things through.
With your professional advisors, consider these questions:
You may want to groom an heir from within the family, groom someone outside the family, consider an outright sale, or have an expert take over until your chosen heir is old enough or fully prepared. Any one of those scenarios takes time to develop.
The financial implications of business succession are complex, but you and your financial advisor can tap into several strategies to help you refine your plan.
Here are a few examples:
Sale to intentionally defective grantor trust (IDGT)
Don’t let the name throw you off. A sale to an IDGT is a sophisticated planning strategy to transfer assets from one generation to another, while minimizing income, estate and gift tax liabilities. Families with closely held businesses structured as partnerships or S corporations may find it particularly helpful as they smooth transfers to your heir without incurring gift or capital gains taxes on the sale and shift the value of the assets out of the grantor’s estate.
Grantor retained annuity trust (GRAT)
A GRAT can help insulate assets that you expect to appreciate significantly from being overly taxed, and can create a meaningful difference in net proceeds for business owners contemplating a sale or transfer. This is one technique that can transfer wealth with little practical impact on the underlying transaction, yet with substantial wealth transfer results.
Self-canceling installment note (SCIN) and intra-family loan
When you use an SCIN to finance the sale of your business interest, the buyer promises to make payments of portions of the sale price to you for a specified period of time. If the seller dies before payment in full on the note, the note is canceled and no further payments need to be made to the seller’s estate or beneficiaries. Selling a business interest to a family member in a lower tax bracket using an SCIN may allow for a reduction in overall family tax liability. An intra-family loan can be used in coordination with an SCIN.
Putting a plan in place means you and your business are prepared come what may, even in the case of disability or an untimely death. But it’s not just about being prepared in an emergency. It’s about sustainability.
While these can be difficult conversations to have with family members and business associates, they can actually bring comfort – knowing everyone is on the same page when it comes to the future success of your business.
Changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
Four and a half million Americans over age 50 are going back to work or volunteering after retirement.
And another 21 million say they’re ready, according to a 2014 Encore Career survey. Why? Some want to make the most of their talents; some want social interaction; still others seek to keep their minds sharp and bodies busy.
The extra money doesn’t hurt either, especially with several unknowns that can cloud your retirement picture (e.g., longevity, inflation and long-term care needs). Using the 4% annual withdrawal rate, adding $10,000 in income is basically equivalent to a year’s withdrawal on a $250,000 nest egg.
Something old. Some former entrepreneurs still have a lot of ideas to contribute – taking on consultant roles or short-term contracting stints to share ideas and experience on their schedule.
Something new. Energetic retirees may want to start a different small business – almost a third of former retirees spend about 21 hours a week nurturing their new self-employed status.
A source of strength. Research from the Stanford Center on Longevity shows that continuing to work can lead to better cognitive function.
Place, passion and purpose. Some stave off boredom and gain a reason to regularly get out of the house by lending skills to a nonprofit in need of expertise and an extra set of hands.
Coffer filler. Going back to work can provide extra money to allow your nest egg time to, hopefully, compound over time. It can also help keep your spending on track if something unexpected happens.
Savings. If it fits you and your situation, consider contributing to an employer-sponsored qualified retirement plan or traditional IRA.
The tax man. Even working an extra year or two can push you into a higher tax bracket. Know where you stand and what the next highest threshold is.
Government benefits. New income can affect Social Security benefits, and employer-offered insurance can affect Medicare. Before accepting a new gig, talk to your financial and tax advisors.
Different stages of your post-career years bring different feelings about “work” that arise and evolve over time. Carefully review the possible impact on your financial plan before you punch the proverbial clock once again.
Investing involves risk including the possible loss of capital. Withdrawals from qualified retirement accounts may be subject to income taxes, and prior to age 59 1/2 a 10% federal penalty tax may apply.
For decades, corporations, public market investors and private equity firms with deep pockets got the attention of business owners seeking new investors or an influx of capital. But a new trend is proliferating. Over the past few years, family offices that traditionally have acted as limited partners have been investing directly in businesses, cutting out private equity firms, bypassing the associated management and performance fees, and buying larger pieces of companies. And that means a potential new investor to help your business get to the next level.
This shift is causing investment banks to consider family offices as an option when a company is interested in being sold or raising growth capital. Here’s what you need to know about the rise of family office investing:
A longer-term approach. Family offices are content to hold investments that are performing well, while looking beyond short-term fluctuations. The tendency to hold companies for longer may be appealing to management teams who own equity in the company and wish to stay after an acquisition.
A shot of support. They also use their personal experiences and expertise to help support the companies in which they invest – typically attractive to founder-owned businesses.
Preferred middle-market options. In terms of investment size, family offices can compete against other private equity firms within the middle market. In 2014, 77% of investors polled by McNally Capital said they preferred direct deals over private equity funds. That same year, 84% of family offices said they planned to make a direct investment in a private company within the next two years.
As companies consider moving away from private equity firms, the family office-direct investing model is enjoying great success. Spearheading the trend is Pritzker Group, which has been investing family money directly into companies for 14 years and acquired four platform companies in 2015. Focusing on manufactured products, services and healthcare investments, Pritzker Group is best known for creating the Hyatt hotel chain and the Marmon Group, which was bought by Berkshire Hathaway for $4.5 billion in 2007.
“We have increasingly expanded our dialogue with family offices as we recognize the popularity of the family office-direct investment model,” said David Clark, head of the Financial Sponsors Group at Raymond James. “Over the past 12 months, we have sold three businesses to family offices and continue to include them in our processes as they often represent a unique fit for our clients who are looking for a more patient, long-term capital partner.”
Private equity firms may still be an attractive option, particularly for companies with strong growth prospects. These firms are moving toward an industry-specific structure that allows them to develop the expertise needed to be more strategic in the way they acquire, support and grow companies. Meanwhile, family offices will continue to grow as a viable option for companies thinking about selling or raising private funds.
Talk to your advisor about:
Past performance may not be indicative of future results. Investing involves risk including the possible loss of capital.
Material prepared by Raymond James for use by its advisors. Raymond James is not affiliated with any companies mentioned in this material.