At some point, a successful business faces liquidation for all the right reasons. The business owner has built an asset that is now positioned to sell to another individual, a group of investors, or be acquired by a large corporation. Perhaps as the business has grown, planning has revolved around liquidating; however, often the liquidation plan hasn’t been put in place.
Whether it is a succession or a liquidation, neither are an overnight event and involve many moving parts and due diligence in order to be successful. Business liquidation planning should help to transition you emotionally, as well away from the business.
Therefore, business liquidation and succession should be tackled sooner than later since the sale is likely to be a large part of your family’s wealth and can impact you financially for years to come.
As your business is about to be sold, factors pertaining to income control need be addressed. During the building of your business you were in full control of decision making and ‘income making.’ Now, business decisions may stop, as well as your ability to make income from the business. Without proper planning overspending can result, since you may receive a windfall of money for years of hard work. Tax planning needs to be considered even if your sale proceeds will be paid out over multiple years through an annuity or a life insurance contract. No longer will you be able to offset income with business deductions and your personal income may increase resulting in a higher personal income tax bracket.
Other factors to consider are defining your role and other key employee’s roles during and after the sale and if you will be paid during the transition period. Will you maintain control of day to day operations during the transition? All variables of the transaction from start to finish need to be clearly planned out. There should be a lot of planning that goes into what happens after the sale, too. It is possible that you will maintain control of the business, even if you no longer own it after the liquidation happens.
Family dynamics, mortality, and money are all topics that need to be considered as part of business succession planning. Is the business transferring to family members or will the sale affect others in your family? Are the profits from selling your business intended to provide financially for you for the rest of your life? Will you receive enough profit to maintain a certain lifestyle?
Because there are many types of business succession plans, yours should reflect what is best for YOU. Business succession planning should involve legal and tax professionals, a financial advisor, and an insurance specialist if you plan to use life insurance or an annuity as another vehicle for distribution of the profits from the sale. If you are an entrepreneur that has borrowed money from investors to start or grow your business, I recommend to start planning your exit strategy now, even if you don’t see business liquidation in your immediate future.