Small Business Planning Strategies
Small Business Strategies
For Personal Success
 Business
owners work hard at their businesses, often at the expense of their
own personal financial strength. They sometimes define long-term business
plans, mission statements and goals, but rarely is there anything on
paper for planning and achieving personal financial objectives. Personal
plans change as the business grows and the owner ages. A good plan provides
a means for frequent reevaluation of personal goals and priorities as
well as a structured time line that combines long-term business plans
with personal objectives.
The planning process can be very complex. Once a plan is created
that establishes risk tolerance, goals, taxes and the effects of
inflation, targeted programs and investments are selected to accomplish
them. There are countless programs,  products,
investments and services that can be employed. As an independent
advisor it's my job to inform and educate my clients. I help them
choose only those investment products or services that complement
their own tolerance for risk and that target their long-term goals.
A good financial plan is flexible and fluid. Business and personal
events and circumstances can change from year to year. It's important
that I keep clients motivated and focused enough to insist on regular
plan reviews.
Many owners run their businesses at the expense of their own financial
well-being. They go too long before such planning, some never plan.
For most small businesses this problem is usually not addressed
until it's too late. When they do begin planning, most have short
and long-term goals that vary greatly. However, funding for their
retirement is the most common "end game" goal. There are
four basic ways small business owners ultimately approach the funding
of their retirement:
Select a Strategy
Fund retirement from…
Fund retirement from income saved while operating
a business.
For business owners who can't count on the future sale of their business
to fund retirement, it's crucial that a financial plan be implemented
as soon as possible.
 In
many businesses it's a constant tug of war between business cash
flow and building personal financial strength. It's much easier
not to confront the issue but to push it back to a later date. This
is sometimes a question of living comfortably or "just getting
by." At some point a business must reach a point of maturity
by which it has the cash flow it needs to operate and support the
owners and their financial future. If retirement is one of the goals,
and a seasoned business can't support the owner's retirement funding,
a decision must be made as to whether continuing the business is
a viable strategy. A financial plan can help determine when that
decision should be made and maybe help shed light on a better way
forward.
The longer a business owner waits to plan and fund retirement
the more money it will likely take to be successful. One of the
main benefits of planning is that it forces owners to face their
financial future and to take action. Planning can help with the
necessary discipline and focus to achieve future personal financial
security. One of those disciplines would be to pay yourself first,
to put money away each month from the income generated by the business.
Many tax-advantaged, tax-qualified savings programs are available
to business owners and their employees to invest in anything from
stocks and bonds to commodities.
 Real
estate, because it can be leveraged, generates income and adds diversification,
is another good portfolio consideration. If you own your own commercial
building part of the planning process may be to include strategies
that would later convert that asset into an income stream, or create
a pension for life. If you're renting commercial space for your
business, buying your own building could be a good strategy. Leveraging
capital to obtain a conventional commercial loan or SBA loan to
buy commercial property can make sense, as your rent payments are
then direct contributions to your financial portfolio rather than
someone else's. Whether you own it directly or through an equity
position, real-estate stocks, mutual funds or REITs are a great
addition to a diversified portfolio. Some real estate and commodities
exposure can have a positive effect in both real return and risk
management of a diversified portfolio.
The size of your business and the ages and salaries of your employees
often determine which type of retirement plan is best for you. Non-qualified
plans allow you to selectively benefit yourself and key employees.
Aside from qualified retirement accounts, put as much as you can
into passive income, that is, income derived from real estate and
investments in which you are not actively involved. The more passive
income you can develop, the more you can save in the qualified retirement
accounts. Planning can help get it snowballing in the right direction.
This is not an easy goal, but those small business owners who paid
themselves a pittance during their working years could wind up getting
hurt because they won't collect much in social security.
Fund retirement from the money made when selling
a business.
 With
comprehensive planning, selling a small business or practice can
prove to be an integral part of a retirement strategy. Without deliberation
and planning, however, this course of action could be a great disappointment
or even a disaster.
For many business owners, the sale of their business is the most
convenient and painless answer to their retirement. But in reality
it's just a vague idea or at best a loosely thought-out plan to
be dealt with some time in the future. This can also be an unintentional
excuse to avoid confronting the inevitable retirement and serious
planning.
For this strategy to work there must be a comprehensive plan examined
from many different perspectives ranging from business structure
and cash flow to future evaluation and capital gains tax. One of
the biggest failures of this strategy is to neglect or underestimate
the impact of taxes on the profits of the sale. The structure and
type of your business (sole proprietor, S-Corp., C-Corp.) greatly
affects the amount of taxes you will pay. Preplanning can set in
motion a means of changing the structure over time, if necessary,
prior to the sale of the business. Consultations with CPAs and/or
attorneys can be well worth the time and expense of addressing these
issues.
If real property is involved in the business sale, then an exchange
may be a consideration in planning. IRS Code Section 1031 provides
investors and businesses with a method to defer capital gains liabilities
when selling qualified property and the proceeds from that sale
are reinvested in like-kind properties. With proper planning, taxes
can be substantially reduced and potentially eliminated.
Other strategies might include the use of a structured sale. A
structured sale is a special type of installment sale. Installment
sales permit sellers to defer recognition of capital gains on the
sale of a business or real estate to the tax year in which the related
sale proceeds are received. Structured sales allow the seller of
an asset to pay taxes over time, while having the payments guaranteed
by a high credit quality alternate obligor, who accepts assignment
of the buyer's periodic payment obligation. In a structured sale,
rather than the buyer paying the installments, the buyer pays cash,
some of which is used as consideration for a third party assignment
company to accept the payment obligation. The assignment company
then purchases an annuity from a life insurance company with high
financial ratings.
Other major concerns that can be addressed by planning are the careful
transition of the sales proceeds into a reliable source of income. Planning
can also help determine if the income will be sufficient and the associated
risks are acceptable.
It's important to keep in mind that a business can take time to sell.
The time it takes depends partly on the economy and type of business.
But the most influential factor is its cash flow in relation to its
asking price. The planning process can help position a business for
a more favorable outcome.
Fund retirement from money made when transferring
a business.
Many small businesses are run by families. If the end game involves
transferring the business to a family member(s) or employee(s),
planning is the best place to start. Business succession planning
can be a complicated process. There are many legal and tax-related
issues involved in business transfers. Many of these plans require
that the process for planning and funding a transfer begin many
years in advance. Most are so complex that attorneys, CPAs and other
financial professionals should be involved.
One way to transition a business from one generation to the next
is through the use of an ESOP. An ESOP, which is an acronym for
Employee Stock Ownership Plan, is a tool that allows owners to tap
into the wealth they have built up in their business. This is done
by implementing a partial or complete buyout of their shares in
the business. Because an ESOP is a retirement plan, the buyers and
sellers in these transactions enjoy tax benefits that aren't possible
with ordinary leveraged buyouts.
The chief aim of an ESOP is to transition an often-aging owner
out of a business while setting up a way to attract, reward and
retain a company's workers. The company must be a C-Corporation
and the seller has to relinquish at least 30 percent stake in the
business.
Most companies must obtain financing to buy the owners shares.
First, the company obtains a bank loan and lends this money to the
ESOP trust, which then uses the cash to purchase the owner's shares.
ESOP's typically appeal to owners who are interested in rewarding
the employees that helped them build the business. The most promising
candidates for ESOPs are often privately-held firms that have a
history of profitability. The best assurance of a profitable history
lies in the dedication to financial planning.
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