What Comes First? Retirement, Succession, or Estate Planning
For the Small to Mid-Sized Business Owner
What Comes First?
As a small to mid-sized business owner where your business is your primary asset, estate and succession planning can open the door into some complex issues. In basic terms, succession planning is an important process that will eventually allow you to exit your business and have someone else take over, and estate planning allows you to stipulate how your remaining assets will be divided once you are gone. Together, then, these planning processes bookend the important - and hopefully lengthy - period of retirement. While owners often begin by thinking about either their estate or succession plans, the particulars of their retirement (and their spouse’s retirement) are often overlooked until much later. To be sure, retirement, succession, and estate planning are all crucial elements in a broader, overarching process of continuity planning. But the order in which you tackle them can make a significant difference to the kinds of choices you make and procedures you undertake.
Often, small and mid-sized business owners are tempted to put the cart before the horse when it comes to future planning. It is tempting to think about a rising generation, and what might be left to them, before planning for yourself and your spouse. But this process is ultimately backwards: as a senior generation, you need to begin with you, and what you and your spouse need for retirement, so that you can determine what is realistic or even possible for your business(es) and your kids.
From the Individual Level to the Family Unit
In most of our work with families we encourage the family to come together to discuss important decisions. However, retirement planning begins with a more individual or couple-based process. A retirement plan requires personal planning around what you hope for and desire in your retirement outside the broader considerations of your enterprising family.
When taking on retirement planning, you must consider what you will need to ensure your own livelihood after you leave the workforce. The questions you can ask yourself are personal ones: “How much money do my spouse and I need to sustain the lifestyle we desire in retirement? Do we have enough money outside of the proceeds of the business to continue maintaining our lifestyle after we retire? Is the sale of the business the source of our retirement funds or do we have other income sources available? What are our ideal scenarios, and what is possible?”
This differs from the questions you may ask when planning for the transition of your estate or business, which are usually more collective in nature. In estate planning you may ask yourself questions like: “How do we fairly divide up our assets for the succeeding generation and others who are important to us? How do we minimize the tax associated with these choices for ourselves and our beneficiaries? What kind of legacy do we want to leave? Who do we trust to execute on our wishes?” When it comes to planning for the succession of your business, your questions will inevitably centre more specifically on the realm of transitioning both the management and ownership of your operating business(es): “Who is the best successor for the business? How will we prepare the next generation for management and ownership? What structures will organize them as they take on leadership? Will I or my spouse participate in the business structure after retirement?”
While these questions are all important to weigh and consider, ensuring your stability after you retire will have important implications for what is possible when you take on estate and succession planning. Taking care of your kids, and considering those questions about the collective, often means ensuring your future first, and thinking about what you and your spouse need.
The Retirement Plan, Then Everything Else
More often than not, when we begin working with families in these areas of planning, we are asked to offer support as they begin working on a big process that encompasses estate, retirement, and succession planning. But with many of our clients, we hold a vision of the big picture, while simultaneously narrowing in on these more individualized questions to clarify the possible pathways forward. If a retiring generation is completely focused on figuring out how to equally divide up an operating business to their children, but they have not yet determined what they will need to secure a stable retirement, the kinds of solutions we help them find may not actually work when the time comes. Likewise, if a retiring generation needs to sell a business to secure their retirement, the rising generation may only be able to take on this ownership if they are able to secure the funds to purchase the business from their parents.
The threads of all of these interdependent questions are most succinctly distilled into two crucial areas for you to recognize as a senior generation. Whether you’re a business owner closing in on retirement, or still see succession as a long way off, these are essential for you to carefully consider.
1. Being dependent on the sale of your operating business(es) is risky. It can prove to be shortsighted when it comes to retirement planning and may hinder your flexibility as you divide your estate. Decisions may need to change as you build processes of continuity and succession for your business, ownership, and family. According to a 2019 Exit Planning Institute (EPI) study, most business owners have 80-90% of their wealth locked up in their business. An earlier EPI study from 2013 also revealed that only 20-30% of businesses that go to market actually sell. This research bears out what we often see in practice.
Thus, both the value of your business and the diversity of your assets will have significant implications for your retirement options. The quality of your financial planning will also, in turn, have a large impact on your options for succession and what will be included in your estate.
2. Think about yourself, too. Finding clarity about what you need helps the whole family. In fact, taking care of yourself and your spouse is taking care of the whole family. Rather than making decisions that you think will make things equal for your family (i.e. ensuring that each of your children gets an equal slice of the pie), what is best for your family and your options in the long run often means making decisions that will secure your wellbeing and stability in retirement.
Making these financial calculations is often not easy, and you may not like the answers you get. But understanding the possibilities available to you may help you to make different choices now to open up new pathways later.
In sum, eventually the relationships between retirement, estate, and succession planning need to be considered holistically as part of your greater continuity plan. However, getting to the bottom of these complex spheres requires an initial foray into financial planning for retirement. The information you glean from getting clear about what you want, what you need and what is possible may change where and how you invest your money, what and how you communicate with the next generation of your family, and what kinds of expectations you have for your estate. For most small to mid-sized business owners, changing the order of these planning processes - and beginning with your own and your spouse’s retirement - can change the way you think about yourselves and your business(es) in fundamental and important ways.
Judi Cunningham is the founder of Trella Advisory Group. She is passionate about family and business and has dedicated her career to helping family enterprises thrive. With a holistic view of the needs of family enterprises, Judi facilitates alignment and decision-making processes with strategic thinking and adept facilitation. With a Masters degree in Family Systems Counselling and over 20 years consulting with complex family enterprises, family offices and professional advisors, Judi is a creative and deep thinker.