Are you a business owner who wants to retire someday? Would you like to see the business continue after your departure with younger family members and/or other key employees in charge? Accomplishing the dual goals of retirement and continuity of the business is possible, but it takes planning.
Because every situation is different, your plan should be tailored to achieve the results you desire. That said, you may be interested in an illustration of how a transition plan could be crafted.
Step 1 — Establish a New Entity
A new business entity is formed sometime before your anticipated retirement date. The new entity — let’s assume it is a limited liability company (LLC) called “Company 2” — is capitalized with contributions from the new owners and a small contribution from you.
Step 2 — Transition Operations
Company 2 operates alongside your old company during a buyout period, with you as the managing member. During that period, your old company finishes its existing work and collects its outstanding accounts receivable.
New work is funneled to Company 2 as it comes in. Company 2 rents equipment from your old company and gradually buys the equipment. Any new equipment that must be acquired during the transition period is purchased by Company 2.
Your old company receives a management fee for your assistance during the transition and is reimbursed for any operating expenses it incurs on Company 2’s behalf. You continue to receive a salary from your old company. At a prearranged time and price, the new owners of Company 2 buy out your interest in Company 2.
Step 3 — Liquidate
At the end of the transition period, your company sells its remaining equipment to Company 2 and liquidates, distributing its equity to you.
With this plan, liability for claims that could arise from Company’s operations during the transition period are shifted away from your old company, helping to ensure that its equity will be available to you for retirement. Meanwhile, Company’s new owners are in a position to benefit from any future increase in the new company’s value.
Note that this is just one of several ideas for implementing a business transition; any plan should be customized to your specific situation.
The future of your business is too important to leave to chance. Why not get ahead of the curve by starting to think about a continuity plan well in advance?
For more help with your retirement and business continuation plan, give our Round Rock, TX CPA Firm a call today at 512-255-7110.