Most succession conversations begin with the company: who will lead it next and when the transition should happen. For owners whose business represents a large share of their wealth, a personal question deserves the same attention: Will the transition give you enough to retire the way you want?
Business succession planning and retirement planning are closely connected when the company is expected to fund a meaningful part of retirement. What matters is not simply what the business is worth, but what you are likely to receive after taxes, when that money becomes available and how much you have already accumulated outside the company.
For that reason, business succession planning and retirement planning are often most useful when considered together.Start With the
Start with the Retirement You Want to Fund
For years, your company may have supplied much of your income and your ability to save. Once you step away, those resources need to be replaced by investments, retirement accounts or proceeds from the transition.
Working backward can help establish what you actually need from the business. Consider the income you expect to need each year, when you would like work to become optional and what you have already accumulated outside the company.
That gives you a more useful target than planning around the estimated value of the business alone.
Your Business Value and Retirement Value May Be Different
Say you hear your business is worth $10 million. It’s natural to begin thinking about retirement based on that figure, but the amount ultimately available to you may look very different.
Federal and state taxes can materially affect the proceeds of a sale. California taxes capital gains as ordinary income, and federal long-term capital gains tax may also apply. Deal expenses, payment timing and the structure of the transaction can further affect what you receive.
The more useful planning question is: How much will you have available after the transition, and when will you receive it?
That answer can vary significantly depending on how you leave the business.
Four Owners, Four Different Retirement Questions
Consider how the retirement question changes in these hypothetical situations:
The founder weighing a private equity offer
A founder receives an offer with most of the purchase price paid at closing and the rest tied to an earnout. Her question is whether the proceeds she can count on at closing are enough to support retirement without depending on future business performance.
The owner transferring the business to a child
A business owner plans to sell his company to his daughter over 10 years. His retirement income will remain connected to the business long after he steps away, while his estate plan also needs to account for a son who is not involved in the company.
The partner selling gradually to key employees
An owner plans to sell portions of her interest over several years while continuing to work. Her focus is on how much wealth she should build outside the company before the final ownership interest is sold. Depending on the business, a cash balance plan may provide an additional way to build retirement assets before the transition.
The founder staying on after an acquisition
A startup founder will receive part of the purchase price in the buyer’s stock and remain with the company for two years. His transition creates new questions around investment concentration, taxes and how much of his wealth is truly available to support retirement.
For founders facing a significant sale or acquisition, our article on preparing for a liquidity event looks more closely at the decisions that can arise before and after closing.
Tax Planning Can Affect the Outcome
Some of the decisions that affect the tax result of a succession need to happen before ownership changes.
The structure and timing of a sale can influence what the owner ultimately receives. Family transfers may bring additional estate and gift planning considerations.
That’s why tax planning can be particularly valuable while there is still time to compare possible approaches. Johanson & Yau’s wealth advisors work alongside an established CPA firm, allowing tax considerations to be part of the succession conversation before major decisions are finalized.
Plan for What Comes after Ownership
A business transition can also change the role your investments play. Before the transition, the company may have been both an asset and a source of income. Afterward, your portfolio may need to provide a much larger share of what you spend in retirement.
A broader business and personal financial plan can help connect those decisions. You don’t need to know your exact exit date to begin asking whether a future transition could support retirement. Modeling different possibilities early can show whether you need to build more assets outside the company, reconsider the timing of a transition or adjust what you expect the business to provide.
A succession plan should work for the future of the business and for the owner leaving it behind. Johanson & Yau helps business owners across Silicon Valley connect succession and exit decisions with retirement planning and tax considerations. Learn more about our business succession and exit planning services.
The examples are a hypothetical illustration for educational purposes only and do not represent the results of any actual client. The figures and individuals described are entirely fictitious and should not be relied upon as a prediction of future performance.
Cetera Wealth Services, LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.