Why Financial Planning is Crucial to Succession

As a business owner, your priority is likely the day-to-day operations of running and growing your company, and that’s where you focus the majority of your time, passion and resources. But how much time do you spend thinking about selling the business and what comes next? Most business owners have not considered or appropriately planned for any future transition from the business, whether in preparation for retirement or for new investment opportunities, and therefore don’t know what to expect financially in the future. Financial planning can help you make certain you are ready to address your financial needs and desires after transition, such as funding retirement, taking care of family needs, managing debt, paying any insurance premiums and setting aside funds for any hobbies or travel.

Provide the Roadmap

Financial planning can help you determine if your goals for transition are realistic. For example, if you plan to sell your business at the age of 55 for a net gain of $5 million, but you plan to spend $400,000 a year in expenses, then your plan is most likely not going to successfully meet your needs. For one reason, $400,000 is 8 percent of $5 million, and the recommended safe withdrawal rate (the amount you can spend each year from your portfolio without ever worrying about running out of money) is approximately 3 to 4.5 percent. Also, things are typically more expensive tomorrow than they are today, which means your $400,000 in annual spending today will eventually grow to be $500,000 per year or more. Add in unexpected expenses in retirement, including growing healthcare costs, and you can see why $5 million is not enough to support the desired lifestyle. Discussions with your financial advisor can help you determine what you need from the sale of your business in order to have enough money to sustain throughout your expected lifetime, and financial planning can provide the roadmap for how you need to grow your business to ready it for sale to meet your post-transition goals and needs.

Budget for Accountability

Business owners are used to having their money in the business – not readily accessible – so when you sell your business, you may not be accustomed to possessing so much liquid cash at one time. As part of your financial plan, it is critical to have an accurate budget to keep yourself accountable, and your financial advisor can help you prioritize spending needs which may include an annual living fund, debt payoffs, gifts to charity or investments back into your portfolio. Ongoing reviews of your plan can help you be certain that you are staying within your budget so that you can live your best life and have peace of mind that your wealth will last throughout your lifetime.

Avoid Sudden Wealth Syndrome

A sudden shift in your financial status (negative or positive) has the potential to be traumatic – it’s called Sudden Wealth Syndrome (SWS). SWS affects individuals who find themselves in possession of newfound wealth, causing some to be afflicted by stress, which can then lead them to make uncharacteristically unwise decisions with their finances. If you are preparing for life after the sale of your business, you can avoid SWS by taking a holistic approach to wealth management and having the right team in place, which may include your financial advisor, CPA, attorneys and insurance representatives. Having a financial plan and working with your team of advisors to make sure you are on track for managing your assets appropriately may help you avoid SWS and can give you confidence about the security of your financial future.

Address Specific Family Needs

Part of financial planning is anticipating how transition affects family finances in both short-term and long-term ways. Will a family member take the successor role, thus affecting the liquidity that comes to you after transition? Can family members receiving any of the liquidity properly handle the wealth? Does your family plan to make philanthropy a priority? Should you establish trusts for future generations? Finding answers to questions like these is the first step, which makes it easier to develop the right plan to take action and avoid surprises in the future. Once you have an appropriate plan, you can begin to share with family members, educating them on any expectations and obligations.

There is a well-known Chinese proverb which says, “The best time to plant a tree was twenty years ago. The secondbest time is now.” It’s not too late to start planning for the future – now is the time to meet with your team of advisors to start discussing an eventual exit from your business along with any challenges or complexities that could keep you from meeting your goals. When the time for transition does arrive, you will have better financial clarity and be more prepared to tackle the next stage of your finances in the way you desire.

For more information about wealth management, contact us at info@dhgwa.com or visit our website at www.dhgwa.com.

The content in this article is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The information in this article is believed to be accurate as of the time it is distributed and may become inaccurate or outdated with the passage of time. You should contact your financial advisor or CPA professional before making any tax or investment-related decision. Past performance does not guarantee future results. All investments may lose money.


John Roberts
Managing Partner, Services

Sarah R. Paris
Financial Advisor, DHG Wealth Advisors


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