Wealth Management Strategy, Industry Today
More than 30% of private manufacturers and distributors surveyed for Sikich’s 2019 do not have a succession plan in place.

July 29, 2019

By Andrew Paoni, Sikich

Selling a business is an emotional and time-consuming experience. But, well before a sale happens – or negotiations even begin – a business owner needs to think about his personal legacy and long-term financial goals. Then, he needs to develop a comprehensive wealth management strategy that will help him meet those goals.

Ideally, business owners would have been planning for an eventual exit and retirement many years before a sale. But the reality is that many company leaders don’t plan adequately for the future. More than 30% of private manufacturers and distributors surveyed for Sikich’s 2019 Manufacturing and Distribution Report do not have a succession plan in place. Of these companies, 67% said the reason they don’t have a plan is that the owner has no immediate plans to retire or exit the business, and 53% said other priorities are more pressing. And if they haven’t thought through succession, they likely haven’t fleshed out a post-exit wealth management plan either.

However, acquisition offers can arrive unexpectedly, and if an owner is not prepared with a succession plan for his company or a wealth management plan for himself, he can end up considering acquisition offers and making decisions with a murky understanding of his current financial situation and future needs.

Of course, financial planning is rarely enjoyable and may force an individual to confront bad spending habits and, in some cases, change his lifestyle in significant ways. For instance, does a $300,000 lifestyle need to become a $150,000 lifestyle once paychecks stop coming in? However, it’s a crucial conversation to have so an owner can set himself up to preserve his wealth for generations to come.

Budgets, hopes and dreams

Much of a manufacturing company owner’s wealth likely resides within his business. And, if he hasn’t gone through a comprehensive financial planning process and outlined long-term goals, he has created unnecessary risks for himself and his family. There can be significant consequences to not adequately planning. In the worst situation, he could run out of money. But, even if things never get that dire, he could miss opportunities to provide adequately for his children and grandchildren or donate to charities he cares about.

The first step in constructing a wealth management plan is the most basic one: create a budget. Pull out receipts, review credit card statements and calculate annual expenditures on food, housing, travel, entertainment and more. Then, compare that number to the total amount of money coming in on an annual basis. This basic budgeting process will provide clarity about how much money the owner’s current lifestyle requires.

One crucial consideration for a business owner is how his expenses will change after a sale. Owners often face bigger financial adjustments during retirement than others due to how much of their lifestyles are typically intertwined with – and funded by – their businesses. In a closely-held business, everything from cars to cell phones to many meals may be paid by the company. However, as soon as an owner exits the business, these business expenses will suddenly become personal expenses that he must account for in his budget.

After the budgeting process, it’s important to think through post-sale aspirations. Everyone has a vision for life after work. For some, it involves travel they’ve deferred for many years while they were building and running their businesses. For others, it involves downsizing and simplifying life. A business owner must think through what he hopes to do and accomplish during retirement, how flexible those plans are, and how much they will cost.

Then, a business owner should attempt to map out his long-term financial legacy. For example, how much money does he want to give to charity over the next decade or more? What regular, ongoing giving does he want to make to family members (e.g., grandchildren’s college funds)? How much does he want to leave to family members when he dies? Putting hard numbers next to these goals will create a solid foundation on which to build the various tactical elements of a financial plan.

Build a financial plan that stands up to tests

A good financial planner will build a plan in line with an individual’s appetite for risk and design it to grow in a way that accounts for inflation-driven cost-of-living increases. A financial planner should also design the plan to withstand various market contingencies. Monte Carlo simulations are useful ways to assess how plans will perform under different scenarios – from the best markets to the worst. The goal in performing these simulations is to fine-tune a plan and minimize an investor’s risk across most market eventualities to preserve wealth over the long term.

A business owner can also consider various investment vehicles and tools to manage and deploy his money. Donor-advised funds can help an owner mitigate the tax burden from a post-sale influx of money and contribute to favored charities. These funds offer great flexibility, so an investor can direct money to different charities over many years.

Business owners can also give to individuals, such as family members, up to $15,000 per year. And setting up a trust can help an individual structure how various family members receive money over time.

Gain an edge with financial planning

No two lifestyles are alike and, as a result, no two wealth management strategies will be alike either. But everyone can gain an advantage by planning ahead. Having a clear understanding of the amount of money he needs in retirement can even give a business owner an edge in a deal negotiation. With a clear number to aim for, he’ll know when he can confidently say, “yes,” and when he needs to walk away and seek new offers. Additionally, an owner who knows he needs income for several more years to meet his financial goals can work to negotiate his continued employment as part of the sales package.

If a business owner has a successful and lucrative company and enjoys a stable lifestyle as a result, it can be easy to defer long-term financial planning. But, if an owner waits too long, he could be putting his financial security at risk and may end up with a less-than-optimal deal for his business.

A business owner has many people who depend on him – most importantly his family. Long-term financial planning in preparation for business succession can help him ensure he protects those closest to him and leaves a legacy beyond the four walls of his company.

Andrew Paoni Sikich, Industry Today
Andrew Paoni

About the author
Andrew Paoni is a certified financial planner and partner in Sikich’s wealth management practice. Investment advisory services offered through Sikich Financial, an SEC registered investment advisor.

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