For the family business owner retirement planning is more complex than just funding a qualified retirement plan (401k, SEP, SIMPLE, etc). These types of plans might provide a fraction of what you need in retirement and contributions for employees can be very expensive. Generally family business owners choose one of four exit strategies: Die at your desk, retire and pass the business within the family, retire and pass the business to your partner, or retire and sell the business. Each strategy has it''s own unique issues that are better addressed sooner rather than later.
Die at Your Desk
You may be the type who wants to work until they drop. That''s fine, but you better do some planning. Where will the
money come from if you can only do a fraction of your old duties and more people have to be hired? What happens if you
become physically unable to perform any of your duties? In this case, without proper planning, your salary may no longer
be tax deductible to your company creating an extra financial burden. If you retain ownership of your business where will
the money come from to pay estate taxes when you do finally pass away? This could equal 50% of the value of your estate
(with the IRS being the people who value your business) and is due in cash. Few if any families have that kind of liquidity
available on short notice.
Pass the Business Within the Family
If you would rather play golf than work in retirement you might decide to pass the business on to your children and live off
of the cash flow. Be careful, payments made to you may be classified as dividends and be taxed twice. Where will your
children get the cash flow to pay you out and also pay their own salaries? You still have the estate tax problem when you
die unless you give the business to the children now? If you decide to give it to them now how do you still retain some
control? You might decide to put in some sort of retirement plan that will pay you out. If so you need to decide whether it
will be structured to provide contributions for all employees with retirement payments being taxable or with contributions
just for you and tax free retirement payments.
Give the Business to Your Partner
If you plan on retiring and letting your partner run the business make sure that you have a funded buyout agreement in
writing. You also need to make sure your spouse is protected. If you should die prematurely your spouse inherits your
share of the business and could be put at the mercy of your partner who has a much better understanding of what the
business is worth.
Sell the Business Outside of the Family
Often family business owners are forced into this option because they need the cash for retirement and didn''t start their
planning early enough. Maybe your kids don''t want the business or you need the cash. Your employees might want to
buy you out but where do they find the cash? You also need to look at the capital gains tax implications of selling your
stock. Do you want to defer the taxes, pay them today, stretch out the payments, or neutralize them?
As you can see there are a number of issues to consider no matter what your exit strategy is. Proper retirement planning involves deciding how you want to do it, coordinating with your family, protecting yourself if things don''t go as planned, and asking yourself the right questions and finding the right answers.