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The Importance of Estate Planning for Small Business Owners – Part 3

How Retirement Impacts Estate Planning

Very often, when someone passes away, the buy-sell agreement will have been funded with life insurance. When someone is going to retire, you don’t have that. Getting to a full retirement for someone who has run a small business can really vary: on one extreme, you have professions like a veterinarian or a dentist where there are active markets with corporations that will buy your practice from you and they have formulas for what your practice is worth based on your revenues from recent years. The opposite extreme is with entities like a small autobody shop or other type of “mom & pop shop” where there is not necessarily an active market of buyers. If you don’t have someone who is ready to step up and buy the business, you could find yourself in a bind in terms of getting out – that’s why it’s not uncommon to see business owners continuing to work, even if it’s part-time, well into their seventies because they haven’t figured out how to make a graceful exit and don’t have a natural or obvious buyer.

Another thing to keep in mind is that in different industries, there are different feelings about what the potential value of a business is. As I mentioned earlier with the example of veterinary or dental practices, there are corporations that have done the research to know that most of the time, those clients will remain loyal if the level of service is maintained. In other industries, the potential future value may not be as clear or obvious. With the small businesses that are more typical here in New Hampshire, such as an autobody shop or even a law practice, the difficulty lies in the fact that the value of the business is tied up in the individual whose force and personality started and grew the business and plays an integral with customers or clients. For businesses where there is no guarantee of customer loyalty or clients under contract, it creates a scenario where you may identify a potential buyer who does not see the same value when it comes to the actual sale of the business. In turn, this can result in a misinterpretation of the true market value of the business, requiring compromise arrangements and new potential adjustments on anticipated retirement assets and income.

This can also create some stress and uncertainty, especially for the spouse of someone who has worked hard to build the business, only to find themselves unable to retire on account of being unable to find a buyer. Oftentimes, people who are starting a small business don’t think in terms of, for example, starting a 401k plan because they want to pour all their money back into the business. While this is certainly understandable, it’s important to give some advance thought to the retirement they are hoping to have and realistically consider what a future buyout may yield.

Taxation Pitfalls to Avoid

Speaking as a small business owner myself, I think that taxes is one of the areas where owners can run into a lot of trouble by not hiring or working with the right people. It is critical to have both a talented bookkeeper and a good tax preparation professional because they serve as the guardrails to ensure nothing is missed. Oftentimes in a small business, you will have an owner who is confident that they can do this all by themselves despite a long list of other responsibilities and duties and, frankly, this is where errors can happen.

The reason that kind of help is so important is not only to look out for common mistakes surrounding unemployment or specific tax liabilities, but also because it sets up a good pattern of thinking ahead and provides you with some backup from a planning perspective. Examples of this help might be finding the right time to set up and contribute into a 401k or getting started with a life insurance policy to help protect the business that is being built up, especially at an early age. In terms of taxes, being acutely aware of the requirements is just a good practice to be in because being compliant from the beginning will cost you a little more money, but it’s worth it in the long run and you will sleep better at night.