Personal Financial Planning for Family Business Owners: Providing for the Future Without Rocki

Personal Financial Planning
for Family Business Owners:
Providing for the Future Without Rocki

How do you plan for retirement when most of your wealth is tied up in the business? That’s the challenge facing many owners of small and mid-size companies.

For owners of family businesses, though, that is just the beginning of the challenge. Because they must not only deal with approaches for generating retirement income, but with delicate family planning issues as well.

If the next generation of family members won’t be involved in the business, personal financial planning could take one course. If some members of the next generation want to be in the business and some don’t, personal financial planning could take another course. And if all members of the next generation expect to be in the business, it could take still another direction.

As if all that isn’t enough, personal financial planning in general is becoming more complicated because of changing tax laws and uncertainties about future laws. Owners of family businesses must do their planning in an environment that provides ever-more-complex tax regulations.

The primary issue is whether the business will stay in the family. Traditional ways of taking cash out of the business–selling the business, attracting outside investment funds, or going public–invariably lead to a loss of family control. Taking out too much cash or borrowing business assets runs the risk of weakening the business for the next generation.

The best personal financial planning techniques for owners of family companies might be categorized into three broad types of advice, as follows:

  1. Use qualified pension plans to their fullest.These include profit sharing plans, 401Ks, individual retirement accounts, and so forth. There’s a tendency to downplay the importance of these because of government regulations limiting contributions and providing for involvement of all employees. But if started early in a business owner’s career, structured effectively, and invested well, these can provide substantial retirement income. Moreover, it’s possible in certain plans to protect one’s spouse in the event of pre-retirement death by including life insurance. The family business owner also gains a tax benefit as well as accumulating cash value. Equally important, these plans can be started and continued independent of whether the business will stay in the family. A pension planning expert can provide insights for structuring qualified plans for maximum benefit to the older generation.


  2. Explore non-qualified income vehicles.A number of vehicles are available over and above the qualified plans, offering the attraction of tax-deferred accumulations of interest. These include life insurance, annuities, and deferred compensation. Life insurance, in particular, serves several purposes at once. It provides for a fast-growing cash accumulation that can be tapped at retirement. It also enables a business owner to provide for the family should he or she die before retiring. And, related to this previous benefit, the insurance provides a way to equalize inheritance among children who may not be planning to enter the business.


  3. Sell the business.The exact technique for selling the business will depend on whether the business is staying in the family. If it isn’t, then a conventional sale to an outside buyer might be appropriate. But if the business is staying in the family, then a number of potential techniques exist. Among the possible approaches: Installment Sale. 
    • Self-cancelling Installment Notes
    • “Structured” Buy-Sell Agreement
    • Private Annuity

There are two prerequisites to making these techniques work effectively. First, you must begin as early as possible. This means establishing the retirement vehicles and making regular contributions or payments. Second, and related, is working out a plan in the context of the family situation. This means discussing the options openly and candidly and formulating an overall approach.

From both a financial and family viewpoint, it is complex and delicate. But the rewards for success are immeasurable.