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Business Succession – Plan for it!

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Duane J. Silbernagel Financial Advisor Waddell & Reed

Duane J. Silbernagel
Financial Advisor
Waddell & Reed

Business Succession – Plan for it.
By Duane Silbernagel

Growing up, my maternal grandfather was a self-employed welder. I remember watching him slave away behind his gigantic steel workbench day after day. I lived only a half-mile away so I’d spend time with him during the summer months when I was out of school for summer break. One day, I watched him methodically lay yet another flawless weld down, adjoining the two broken pieces of metal into one piece again. He’d probably made similar welds like that thousands of times. It was just so fluid, so effortless – he made it look easy. We started talking about how he became a welder. During that conversation, I remember him saying “if you ever go into business for yourself, make sure you have a plan to get out.”

Business succession planning is a component to be considered in a self-employed person’s financial plan. If you’ve built a company over time, you want to make sure that is can continue on, even after you are ready to retire.

As with many aspects of planning in general, there are several ways an owner may want to consider using to approach this. This article only addresses two options for succession planning, although there are many others. Before choosing an option, one should discuss with tax and legal advisors. Keep in mind that every family dynamic, every business, and every situation is different. The two strategies covered will be described with the assumption that there is only one beneficiary named for the business.

Direct Sale

This is a common exit strategy used by many. A company has assets and those assets have value. The staff’s relationship with the existing clients has a value. The business may own the building it operates out of. There may be equipment, vehicles, office supplies – all of which carry a value. The real question is to whom is the business being sold to, someone internally (a key employee) or externally (a competitor)?

There is nothing fancy about this type of transaction. Generally, terms are reached and a transition phase, if agreed to, is implemented. The original owner may “phase out” or continue to handle all duties and have a hard date when he is simply gone and the new owner is in charge.

Gifted Transition
This is a transitioning strategy that generally involves a parent to child transition over time and takes place in a business where shares have been distributed, even if only internally to family members. This will also involve a lot of legal and tax documentation, so work with a team of experts in their respective fields.

When establishing a registered corporate entity, one can opt to own shares in the company.

These shares are an asset in the eyes of the IRS. As an asset, the shares may be “gifted” to anyone the owner pleases. Gift amount limits change annually; however, the business-owner could gift shares of the company away, to an heir (or any other party for that matter) while keeping the total monetary value of the shares under the gift tax limits, potentially without incurring taxes. These types of transitions can take several years (depending on the value of the company) to complete. This also may allow the current owner to keep the majority ownership for a much longer period of time. In execution of this type of transition, over time, the company is gradually transitioned to the other party.

A side note: life insurance should be a consideration when executing any type of business succession. Each party has a vested interest in the other surviving at least the length of the contract or transition. The buyer may still have the payment liability to the seller if the seller passes, and the seller may have to take back control of a company if the buyer passes and the family can’t finish the payments or doesn’t have any interest in finishing the transition. Each scenario has different monetary needs, which a life insurance policy could potentially address.

A final point to take away: selling a business can be very tough mentally on the owner. The business has been created, developed and built, possibly from scratch. Many times, blood, sweat and tears went into the creation of the business. There may be a huge portion of that owner’s life tied into making this business succeed. Do not leave a business, the staff and that transition to chance. Start planning today; it can take a considerable amount of effort. Yet, like that weld my grandfather laid down with so much ease – the longer that effort has been applied, the easier it may become in the future.

I hope you found this beneficial and informational. For more information about me and my services, visit my website:
www.duane.wrfa.com

Thank you for your interest.

This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Investing involves risk and the potential to lose principal.  Please consult your financial advisors prior to making financial decisions.

This information is not intended, and should not be construed, as a recommendation, or legal, tax or investment advice. You should consult a tax advisor to answer questions about your specific situation or needs.

Duane Silbernagel is a Financial Advisor in Lincoln City, Oregon offering securities and investment advisory services through Waddell & Reed, Inc.  Insurance products are offered through insurance companies with which Waddell & Reed has sales agreements.  Duane holds securities licenses in (OR, WA, CA and AK), investment advisory licenses in (OR, WA, CA and AK) and insurance licenses in (OR, WA, CA and AK).  He can be reached at (541) 614-1322, via email at DSilbernagel@wradvisors.com or at www.duane.wrfa.com.  Waddell & Reed, Inc.  Member FINRA and SIPC. (07/15)

Waddell& Reed is not affiliated with www.newslincolncounty.com website and is not responsible for any other content posted to this website. 

 

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