Ask business owners what worries them and they are likely to mention economic volatility, taking risks, adequate working capital, and cash flow. But there is one thing that often keeps them awake at night: succession planning. Who will take over the business when they are ready to retire?
Despite that level of anxiety, relatively few business owners actually have a formal succession plan in place — fewer than 30%, according to the 2015 FPA/CNBC Business Owner Succession Planning Survey. What many business owners don’t realize is that their commercial banker can be an ideal resource to help them with not only that, but a host of other business services and concerns.
The survey found that 78% of business owner clients plan to rely on the sale of their businesses to fund their retirement. Conducted by the Financial Planning Association with CNBC among FPA members, the survey also found that the biggest challenges for the business owners were being emotionally ready to relinquish control (33%) and finding a buyer (21%).
Although business loans and access to capital are vital to a business’ success, commercial bankers are in a position to offer far more to business owners. There are many factors to consider, but the best bankers are those who provide relationships and services tailored to you and your business.
Entrepreneurs need bankers with the expertise to help them succeed and grow. A banker who truly understands you and your business can be a trusted partner who can work with you from startup to sale or succession to a partner, employee, or adult child. The following are some areas beyond lending in which commercial bankers can help business owners.
Investment servicesand estate planning — Investing profits for additional income or to grow your business is key to your business’ long-term success. Whether building a nest egg with a financial advisor, or protecting and enhancing your assets with a wealth advisor, your banker can connect you with an investment professional that fits your unique needs. Specialized wealth advisory services such as estate planning can also include investment management, trust services, and financial plans.
Tax planning — Ideally, business owners would work with a tax attorney or advisor as part of their overall financial planning. However, building a business day-to-day requires a lot of time and effort. Often, tax strategies aren’t even considered until year-end rolls around. This translates into business owners seeking last-minute ways to reduce their tax burden, often by taking steps such as large year-end purchases. Your banker can refer you to a tax specialist to work with over the long term, as well as suggest strategies such as deferring income and accelerating deductibles or accelerating income and deferring deductibles, depending on your tax bracket.
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Retirement planning — Many business owners focus on putting money back into the business, especially in the early years, and delay saving for retirement. Your commercial banker can work with the bank’s financial professionals to help you set up an individual retirement account (IRA), SEP, SIMPLE, or 401(k).
A SEP (simplified employee pension) is an IRA-based plan for eligible employees, including a business owner, and those who are self-employed. The employer is allowed a tax deduction for contributions to the SEP plan and contributes to each eligible employee’s SEP on a discretionary basis.
SIMPLE stands for “Savings Investment Match Plan for Employees.” A SIMPLE plan can be used by most small businesses with 100 or fewer employees and allows employers to make a mandatory 2% contribution to all employees or an optional matching contribution of up to 3%.
A 401(k) program offers the greatest flexibility in plan features, investments, and options for employer contributions. The annual limit on contributions is higher, up to $59,000, including a defined contribution limit of $53,000 plus an additional $6,000 for employees age 50 or older. Business owners also may defer up $18,000 in salary. One other attractive feature is the ability to provide for greater contributions to owners and key employees, a valuable tool in succession planning and preparing for retirement. In addition, employees can make Roth contributions to the plan and as well as convert an existing IRA or 401(K) to a Roth account, to reduce your tax rate and eliminate taxes on future withdrawals.
Succession planning — It’s common for business owners to want their adult children to take over a family business, and they often just assume the children will want the same thing. However, it’s important for business owners to engage their children at a very young age if they hope to transfer the business to the next generation. Your banker has access to professionals who are experienced in working with the unique needs of business owners, and can help them identify goals based on individual family dynamics.
There is no set formula for succession planning — the time needed will vary according to the size and type of business. Planning can take a year or more, and some bankers suggest planning should begin 10 years out, especially if the owner intends to retire on the proceeds of the sale or transfer. In addition, business and economic conditions might dictate adjustments to your succession plan or timetable.
Jim Lotter is Sheboygan County market president for Wisconsin Bank & Trust, Member FDIC.
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