Business succession and financial planning for entrepreneurs

Key Takeaways:

• 1.Business succession planning ensures the continuity of your business operations and accounts for future changes and emergencies.
• 2.Start business succession planning early to identify, hire and train potential leaders from the next generation. Plan for the long term and be open and transparent about your succession plan.
• 3.To build a lasting legacy, plan separately for your business and personal financial needs. Protect your wealth with a mix of insurance, investments, and estate planning tools.

As an entrepreneur, you can make certain smart decisions to secure your next phase in business, such as developing a business succession plan and managing your business and personal finances separately.

Figure out how to pay yourself and protect your assets from liabilities. Adequate planning is crucial to keep your business running smoothly despite unexpected events.

Whether you choose to keep the business within the family, retain a role in the company or sell it outright, there will be financial pros and cons.

Why do family businesses need a succession plan?

Transferring a business to family members allows the legacy to be passed on and expanded for generations.

While you can transfer ownership to family members through your will – a form of estate planning – business succession planning is different in that it involves developing a strategy and clear direction for the continuity of your business even after you are gone.

A business succession plan can ensure a smooth transition from one generation to the next, no matter the size of your family business. Make business plans and decisions with a long-term view and communicate them clearly to all family stakeholders. Draw up a formal succession plan and be open with your family to ensure everyone has time to prepare for their changing roles.

The earlier you do this, the more time you will have to train the next generation and kickstart transition plans. Early planning also allows you to capitalise on growth opportunities together.

To avoid potential family conflicts, set up an independent governing board to help resolve issues. Once you have a succession plan, you should also formalise the transfer of ownership in your will to avoid disputes within the family or delays in the distribution of assets.

Why is business succession planning important?

You should still have a succession plan as a contingency, even if your children are not passionate about joining the business. Think of it as a business retirement plan, ensuring business continuity even if the key personnel suddenly leave or become incapacitated.

Preparing a trustworthy successor or succession team provides direction for the business. This goes a long way in assuring employees and maintaining investor confidence.

If you can’t find a successor within the family, look outwards. Identify potential leaders among your existing employees or consider recruiting a potential candidate from elsewhere who is qualified and trained. More importantly, find a successor who shares your vision and mission for the business.

Consider your future company role as you develop a succession plan. If you plan to retire or reduce your responsibilities, review your business structure to keep your company running like a well-oiled machine despite your reduced involvement.

You can build a leadership team to take charge of the planning and day-to-day operations. Step away from hands-on management by raising others to the helm and becoming a shareholder instead. The dividends you receive as a shareholder can then be put towards retirement or into another entrepreneurial endeavor if you wish.

Growing and protecting your personal wealth

Entrepreneurs and business owners are sometimes too focused on the growth of their businesses that they neglect their own financial health. Lines between business and personal finances can often be blurred, such as when you choose not to take a pay cheque in the first few years of operations or have to dip into your savings to fund your business.

However, keeping your business and personal finances separate is essential as this ensures that you and your loved ones have a financial safety net if your business fails.

Here are some ways to do so.

Salary and dividends

While building and growing your enterprise, you might have chosen to earn a salary or receive equity instead. Both can have implications for taxes and retirement planning.

A salary is stable and helps you cover your immediate needs, while equity is unstable but has the potential to deliver immense value in the long term. You can also opt for a mix of both, which allows you to pay your bills while reaping your company's success as it grows.

To keep your business steady in challenging times, consider drawing a lower starting salary so you can invest more into the company's growth. However, make sure you keep your salary and savings for the goals in your personal life.

To build up your backup savings, it is worth topping up your CPF accounts. While CPF contributions are not compulsory if you are self-employed, they can give you returns between 2.5% to 4% and allow you to save for your healthcare, housing, and retirement needs at the same time.

Insurance

Take time to stay up to date with your insurance needs. Insurance is one of the most common ways to safeguard your assets, and packages that include life insurance, health insurance, trauma insurance, and income protection insurance can shield your accumulated wealth from catastrophe.

Even in a limited liability business entity, owners can be subject to personal liability in certain instances, and insurance acts as a buffer.

It can be used as a succession plan in a business partnership when partners each purchase a life insurance plan with the other partner as the beneficiary. If one partner passes away unexpectedly, the remaining partner could use the life insurance proceeds to run the business or buy out their shares.

Estate planning

Consider all your assets and potential tax exposure when developing an estate plan to protect your wealth.

A trusted professional can help you draw up a will or trust to transfer your assets to the right people at the right time and avoid heavy taxes that would erode the value you worked so hard to create.

Besides drafting a will, you can also use the following estate planning tools to ensure that your wishes are fulfilled when incapacitated or after your death.

• CPF nomination: Your CPF money cannot be distributed under a will.
• Life insurance nominations: Life insurance benefits with a trust nomination cannot be distributed under a will.
• Lasting Power of Attorney (LPA): Appoint a trusted person to make decisions for you if you lose your mental capacity.
• Inter Vivos Trust: This allows you to look after your dependents during mental incapacity or death and helps protect your personal assets from business losses or creditor claims.

Achieve financial freedom by developing a plan for your business and personal life

Make your earnings – whether from salary, dividends, or sale proceeds – work for you by placing them in wealth solutions that can help meet your financial goals.

Savvy entrepreneurs should have well-diversified investment portfolios. This includes a mix of high-growth investments and fixed-income securities, which you can adjust accordingly depending on how much risk you are willing to take.

You should also avoid investing all your earnings as there will be both good and bad times. Ensure you keep emergency cash on hand to tide you through the tough times.

It is not uncommon for entrepreneurs to use their wealth to start or purchase another business. Before you embark on your next adventure, consider the feasibility of maintaining both businesses and their future roadmaps before taking the plunge.

Achieve your wealth goals with Citibank for business or personal life. Find out how you can build your legacy and protect what you love through personalized wealth management solutions and in-depth market insights by starting a Citigold relationship today.

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