The way in which retiring business owners plan their retirement is nearly as important as the strategies they used when they first launched or took over their business. Few business owners want to see their companies dissolved, but inadequate retirement planning can lead to insolvency, infighting between heirs and higher taxes.
These scenarios typically occur when business owners fail to pay enough attention to succession and tax issues, and there are several situations retiring owners should consider prior to stepping down from their company.
First, owners should ensure their beneficiaries are equipped to handle every facet of a company, according to the Wall Street Journal. Too often, small business owners oversee all business operations personally, ranging from marketing and advertising to accounting and tax preparation. Failing to prepare beneficiaries for decision-making roles and set clear guidelines for who will manage which divisions can lead to infighting and poor business decisions made by unqualified individuals.
Another common, and costly, mistake is failing to account for changes in a business’s valuation when transferring a company. The value of a business can appreciate by millions of dollars over a short period, and procrastinating when it comes to transferring assets or taking advantage of the benefits and protections under trust law will result in a sizable increase in the amount of taxes owners will pay when they eventually hand over the reins. Business owners may benefit financially from developing a clear-cut succession plan years before they retire and researching several different trust options to reduce their tax liability, the Journal reports.
In addition, failing to frequently conduct valuations can lead to last-minute tax and retirement planning surprises for owners who may have over- or undervalued their companies. For both succession and estate planning purposes, securing an accurate appraisal and valuation is crucial.