Like many small business owners, you may plan on working until you are ready to retire. And, once you reach that point, you may expect to sell your business and live off the proceeds. Or, you may have partners or children who can keep the business operating once you are ready to step away.
However, smart business owners plan for all eventualities. They plan for success but they have a fallback plan in case their efforts don’t bear fruit. As a business owner whose business is probably by far your biggest asset, it makes sense to think about those things that could go wrong and take steps to protect yourself now.
What steps should you consider taking that can protect your future financial security? Consider these contingency strategies:
Put a Retirement Plan in Place
The only constant in business is change. And many changes can harm a business’s financial viability. What would happen to your retirement dreams if your business experienced a serious setback? New technologies come along and make some businesses obsolete. New competitors erase older, established firms and economic downturns impact consumer and business spending. Natural disasters can seriously damage a business’s operations and cause widespread financial loss.
Funding a retirement plan during your working years can help protect your future financial well-being. Additionally, a retirement plan can provide important tax benefits. For example, your contributions to your retirement plan are typically tax deductible while earnings on investments in your retirement plan account grow tax deferred until you begin taking distributions.
As a small business owner, you can choose from a variety of tax-advantaged retirement plans. Each option has distinct advantages and disadvantages when it comes to costs and the burden involved in plan administration. The input from your financial professional can be helpful when reviewing the appropriateness of a particular retirement plan with regard to your business’s specific situation.
Establish a Buy-Sell Agreement
If you have one or more partners or co-owners, it makes sense to have a buy-sell agreement. A buy-sell agreement helps ensure that you (or your beneficiaries) will receive fair compensation for your ownership interest. The agreement also facilitates the orderly transfer of ownership and management. A buy-sell agreement can be drafted among shareholders of an S corporation, partners of a partnership or an LLC, or even between an owner and a key employee.
When carefully crafted, a buy-sell agreement can:
- Help provide a smooth transition of control, management, and ownership to those who wish to continue running the business
- Spell out the financial aspects of the transition
- Establish a fair and reasonable price
- Help ensure the financial security of your family and other beneficiaries in the event of your unexpected death
- Create a built-in buyer for your interest in the business
- Establish, under certain circumstances, an estate tax value for the stock.
There are two basic types of buy-sell agreements: cross purchase and entity purchase (stock redemption). With a cross purchase agreement, the remaining owners agree to buy the departing owner’s interest in the business individually. With an entity purchase agreement, the business itself agrees to buy the selling partner’s ownership interest.
Life insurance is a common way of funding a buy-sell agreement. The proceeds of the policy are used to buy out the departing owner’s interest in the business.
Develop a Disaster Plan
No matter where your business is located, it is a wise precaution to assume that a natural disaster will impact it at some point. Adequate preparation can minimize damage to your systems, your equipment, and your physical plant, and may even protect you and your employees from harm. A key component in preparing for a natural disaster is a disaster plan.
Your disaster plan should include sections on personnel safety, management succession, and data preservation. It should outline the steps employees and managers must take in the event of a disaster.