Avoid These Big 'Retirement' Mistakes Business-Owner Clients Make

An ongoing swell of private equity investment activity in markets across the United States is helping a sizable number of successful entrepreneurs sell their closely held businesses for impressive sums.

In the extensive experience of Dawn Jinsky, partner and leader of estate and business transition planning at the wealth management firm Plante Moran, there has probably never been a busier time to be a financial professional focused on such matters.

In addition to the influence of private equity capital, broad demographic trends are also propelling significant liquidity event activity, Jinsky recently told ThinkAdvisor. Simply put, the baby boomer generation is rapidly approaching and entering retirement, and a significant number of clients have a substantial portion of their wealth tied up in closely held businesses.

This situation necessitates a liquidity event as part of the client’s transition to retirement, Jinsky explains, and getting the process right is not always a straightforward affair. From the potential to launch an employee stock ownership plan to the need to direct money carefully inside and outside the estate, a lot of planning prowess is required to achieve the best outcomes.

What’s more, Jinsky warns, it’s not just big tax and estate planning matters that need to be considered. Clients must also think carefully about their anticipated lifestyle post-sale and “what retirement is actually going to mean to them” after a career spent growing and nurturing a business.

“Advisors who can help steward clients through this whole process are going to be highly valued,” Jinsky says. “I agree with all the advisors out there who say their clients are looking for more from their advisors than ever before, including in business transition planning. It’s an exciting moment, but challenging too.”

Getting the Transition Right Takes Time

Broadly speaking, Jinsky says, clients and advisors who aren’t accustomed to doing this work have a tendency to look at liquidity events as just that — a one-time occurrence that can be planned for and executed in a short timeframe.

“In reality the opposite is true,” Jinsky says. “The best outcomes are achieved with an extensive amount of pre-planning, often over the course of at least a number of years. For example, very early on, you need to evaluate your estate plan and determine if you have an opportunity to make stock transfers prior to the liquidity event.”

As Jinsky points out, people often assume they can make stock transfers, whether to a charity or an heir, as part of the liquidity event. In practice, in addition to not being the most tax-efficient approach, this often just complicates the transaction, and in some cases it may not be possible at all.

“Often, you can’t really do the gifting of stock after a letter of intent is signed, for example,” Jinsky warns. “Generally, the closer to the liquidity event, the less feasible gifting stock becomes, so this is one of the things you really should be doing early on.”

Another key is to help the client clearly evaluate how their financial position will change after the liquidity event, and how they will be spending their time. On the one hand, the client will very likely be sitting on a new and significant pile of wealth, but that doesn’t mean they can just start spending freely without a plan or budgetary discipline.

Of course, if a client sells a highly successful business and generates tens or hundreds of millions of dollars, that’s one thing. But many people will sell a business for still-meaningful, but more modest, sums, and they will have to think carefully about how to make their liquid wealth last for a retirement that could be three decades or longer.