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Small Bites Podcast: Planning for the mid-stage business owner

October 2, 2023
Planning for mid-stage business owners

Dr. Kathy Gosser and Rebecca McDade, J.D. discuss essential considerations for mid-stage business owners, with an emphasis on estate planning. This includes further discussion of the importance of reviewing arrangements as the business grows, as state regulations change, and as one’s personal relationships shift. Such planning is vital to ensure a sustainable and valuable legacy for the future.

Dr. Kathy Gosser, YUM! Assistant Professor of Franchise Management and Director of the Yum! Center for Global Franchise Excellence

Rebecca McDade, JD – Attorney


(NOTE: This is an automated transcription and not intended to be used as a substitution for listening to the podcast recording. Simply click on the player above and receive the full benefit of the conversation.)

So welcome to another session of Small Bites. of Business Insights Talking Wealth Planning. I have Becca here with me again. Hello, Becca. Hi, Kathy. Hello there. And today we’re going to talk about planning for the mid stage business owner. We’ve talked about the early stage, but now let’s go into mid stage.

Your business is up and running, you’re doing well. And so what type of planning should folks who are in that mid stage of their business be considering? So I’m going to start with. What we talked a little bit about with the early stage, which is you need a basic estate plan. One of the things that I have found over my career is that business owners know their business.

And they don’t want to talk about their deaths. And so they generally have not done estate planning. So if you’re a mid stage business owner and you have not yet put in place a basic estate plan, then that’s going to be the first thing that you’re going to need to do. And as a refresher, that basic estate plan is going to be a will, a revocable trust.

powers of attorney for health care, powers of attorney for property and an advanced directive. If you have bucked the statistical trend and you already have a basic estate plan in place, then now is a good time to review your estate plan because I’m sure that things have changed. And the overwhelming majority of people Do a fix it and forget it sort of thing with their estate plans.

So you may have created a basic estate plan years ago and stuck it in a drawer and done nothing with it. So now’s a good time to take a look at it. Things that may have changed would be children, um, marriage, either you have divorced and remarried, you’ve gotten married to begin with your children have gotten married, you have grandchildren.

So family dynamics is one of the largest things. So when you did your estate plan, the size of your business or the extent of your assets may have been significantly less than what they are today. When you had a smaller estate. You were willing to provide in your estate plan that assets would go outright to your children.

Whereas now that your assets are worth so much more, you might be worried about your children getting a large amount at a younger age. You might also be worried about, um, them being spendthrifts or them potentially being subject to creditors. So the growth of your business is another reason why you would want to review your estate plan.

How your business has grown is another reason. So sometimes people have businesses that are all contained within one state. Others have multiple states. So, I’m just over the border, and I’ve got a franchise in, you know, Illinois, and I’ve got it in Missouri. Mm hmm. Um, and the estate plan may have only been based on Illinois law, so making it for Missouri law as well makes a lot of sense.

States have different rules with respect to what counts as probate. They have different intestacy rules. They have nuances, um, in each state that may or may not impact how your estate plan will run. So, reviewing your existing estate plan is high on the mid stage business owners list. I can see that. You know, I’m glad you brought up about all the varying…

Rules and regulations of states, because it is almost mind blowing how things are not consistent when you look at all those regulations and especially in the franchising industry, you’re most likely, if you’ve grown, you’ve grown to more states. That is true. You know, the other thing is that I’m finding more and more with people is that as their wealth grows, they want to find homes that are in different places.

So the Cape and islands. Or Puerto Rico, those are countries that have different roles entirely. So looking at where are all of your assets located inside the U. S. or outside the U. S. You may need a totally new estate plan or a different estate plan for Canada or other countries. I’m sure you would. I mean, nothing is ever easy, Becca, ever.

What about savings? Do you think that needs to change? So I think that reviewing your liquidity buckets makes a lot of sense. Um, we talked about the emergency fund and the retirement bucket. In the mid stage, you’re going to have a better sense of Is my business really going to be my retirement cash cow or is it not?

Um, some of that’s going to be tied to maybe you gifted some of the business to family members without getting any compensation in return. So when it’s sold or what’s left to fund your retirement is less than even what the business is worth. So checking to make sure that your liquidity buckets. Are in good shape, make sense.

Reassessing midterm and long term goals make sense because you’re always creating new goals. Um, and you want to make sure you’ve got enough in there. And even though you’re more established, I still think that having an emergency fund makes liquidity buckets.

In terms of where you’re parking liquidity for children and grandchildren. So for education purposes for them, and I think now is a good time to look at that. Another thing with the mid stage that you might want to be considering is, is it time to start gifting some of my business interests to my kids?

And it doesn’t have to be the business itself. It could be the real estate that the business is. Operating on or it could be other assets, but once you’ve hit mid stage, your Children are probably older. So you’ve gotten to know what their personalities are like, and you may want to start shifting wealth to them either to help reduce your ultimate estate tax liability.

Or because you want to start providing them with an income flow or a wealth foundation. And now is a good time to be looking at what kinds of wealth transfer strategies you might want to Um be incorporating into your overall planning You know, though, Becca, when I think about that, it’s, it’s one thing to talk about it on this podcast and to say, Oh yeah, you could transfer some of your wealth onto your children.

How many people really do that? Well, you know, depending on the size of their businesses, actually a lot, it’s wonderful. This is going to be a little time sensitive. So in January of 2026, this won’t matter anymore, but, um, the exemption amount right now is 12. 9 million, right? In January of 2026, it’s going down to 5 million per person.

So we’ve got a lot of people who are looking at using their lifetime exemptions now because it’s scheduled to go down so significantly. And so they’re looking at what kinds of wealth transfer strategies can we be doing that both allow me to take advantage of the higher lifetime exemption amount yet still.

Maintain some control so that my kids are not getting too wealthy because nobody wants to have trust fund babies. That’s true. But you know what? That’s an excellent point about it changing in 2026. So now is the time to be making those plans. Absolutely. And as we mentioned in the previous segment, now is the best time to be doing any wealth transfer strategies because your business will continue to go up in value unless you know you’re, you’re in an industry where it’s being phased out and the value will be going down.

Um, wealth transfer at the mid stage is just as important as at the early or late stage. Especially with that change in that exemption. Exemption. Yeah, that definitely would drive some action, I would think. And people have time, right? They have a couple of years, but depending on, I think to get people to actually pull the trigger takes time.

So the sooner people start talking to their estate planning attorneys, even if they don’t want to pull the trigger until 2025, it just makes good sense. Planning to plan, right, is a good thing, right? And then you talked about the retirement planning and thinking about, gosh, you just don’t know. I mean, who would have thought the world would be shut down for two years and what it did to business owners, having something besides just your business to rely on.

It’s probably a big idea, you know, so if you started a retirement plan in your early stages, um, and let’s say that all you were doing was an IRA and that was you, you, you don’t have a plan for the business or anything like that. Now’s a good time to look at some of those more robust retirement plans that are out there that will allow you to sock away more money than the 6, 500 that you can do in your, your IRA.

Um, And if you’re in the mid stage and you’re over age 50, being able to enhance the contribution to either your 401k or to your IRA also makes a lot of sense. So just having someone do a retirement plan review makes a lot of sense too. It, it really does. There are so many things to think about, but you have to plan for your future.

We’re living longer, we’re, we’re getting healthier, so you’ve got to plan for that. And as you were saying before, you need to pay yourself first. And with the living longer, when we do modeling for clients, we’re modeling out to age 100. Oh, wow. And there are some statistics out there from five years ago that said that a child born five years ago, their statistical life expectancy actually is 100.

Oh, gosh. Isn’t that something? Who would have thought that? Who would have thought it, really? So making sure that you’ve got enough makes a lot of sense. But not only that you have enough to be able to live out the retirement. Life that you want, but also that you have enough to leave to your family the legacy that you want them to have Mm hmm.

True. And you don’t want to be a burden. So making sure you have enough first and then what you can leave is great too. So that, that is, that is perfect. So let’s talk about business transition planning. Can you tell us what that means and what folks should be doing at this stage? So business transition planning is exactly that you’re, you’re transitioning the business to someone else.

And there are a number of ways that you can transition the business. You can gift it. So if it’s going to your family, you can gift it to them using that 12. 9 million lifetime exemption. You can sell it to them. You can do a combination of sale and gifting, or it may be that you sell to a third party outside your family.

So it could be key employees who are going to end up buying the business from you. It could be that you sell a portion of it to private equity, you maintain an interest, or it could be that you just sell the business outright to some third party. All of those sort of fall within business transition planning and things that people ought to be thinking about include who am I selling to and how are they going to pay for it?

So if I’m selling to my key employees, And my business is worth $50 million. How are my key employees gonna get $50 million to pay me and I need them to pay me 50 because that 50 is my retirement plan. Right? Right. So can they pay me in an installments? Sure, but that puts my retirement at risk because if they don’t run the business well, they’re going to miss those later installment payments.

And I am now hurt in my retirement, right? So thinking about who’s going to buy and how are they going to pay for it? Make sense some of the things that I’m looking at when I’m thinking about how are they going to pay for it? Maybe am I giving them extra bonus money so that they can start to build a net worth?

That allows them to borrow from the bank down the road. Am I Putting the business or maintaining the business In good financial health so that they can borrow against the business when they’re going to buy, should I be giving them some form of stock so that each year I’m passing a little bit of stock to them as part of their compensation that will also help them at the other end when they become owners of the company.

Same thing on the family side. If I’m going to be selling a portion of the business to my family, how are they going to pay for it? Do I need insurance so that they can use those proceeds to buy out my estate? So understanding who’s going to buy makes a lot of sense. Making sure that my key employees are going to stay no matter how I’m transitioning makes sense too.

So if I’m transitioning to family, I want my family members, whoever are going to be active in the business to start interacting with my key employees and building a relationship so that there’s not this, Oh my God, Joe Blow’s gone. I’m not staying at this company anymore. I’m not going to work for his kids.

Mm hmm. But also incenting your key employees to stay. So that may be creating a better compensation plan for them, whether it’s restricted stock units or phantom stock or deferred compensation plans, things that will make your management team want to stay. And then the other thing to think about with transition planning is it’s a good time to look and make sure that you’ve got the right people in the right seats.

So a lot of times we have employees that have been with us from the very beginning and we feel very loyal to them. Right. But we, the company have outgrown them in the role in which they are in. So maybe there’s a different role that they’re better suited for, or maybe it’s time to bring in somebody below them who they can start to train.

Who can transition into them because what you’re wanting is to make sure that at any stage when the business has to be sold, it’s in good financial health. And the way to do that is making sure that your employees are going to stick around. And that they’re sitting in the right seats. And I have seen that.

I’ve seen people that started their company small, and they do have that loyalty, and the company has outgrown some of those key employees. And they just keep them, or they give them increasing levels of responsibility, and they’re just not prepared for it. And that can hurt the overall valuation of the company.

Absolutely. And even though we’re talking transition planning in the mid stage business owner section, the mid stage suggests that you’re not ready to transition your business yet. So why is she talking about transition planning? And that’s because you never know when you’re at the mid stage, you never know when that deal that you can’t refuse is going to come along.

But more importantly, You never know when the proverbial bus is going to come and your family is going to be left with a business that you don’t want to go down in value because you’re no longer there to lead it. You want it to be able. to be sustainable if an emergency happens. And that takes planning, which you’ve described beautifully, Becca.

Thank you so much for this session. Absolutely. It was fun.