Carina Diamond, a managing partner of SS&G Wealth Management in Akron, Ohio, has many clients in their fifties and sixties who've built small companies and are now thinking of putting up their business for sale. "There's a lot of activity this year because you pay taxes on the sale at long-term capital gains rates, which are capped at 15 percent this year. They'll probably go up next year."
We normally think of small business solutions as how to run your company; but it's just as important to set up the sale of your company in a way that will provide for you far in the future – possibly the rest of your life.
"You've had a business and it's been your baby. When you sell, suddenly you don't have a paycheck anymore. Instead, you have a lump sum of money. A lot of people put all their money into their business, and really don't have any other investments. They sometimes don't have a clue about how to invest for the future," Diamond says. There are two key questions to ask when your small business is for sale.
How Much Cash Can You Generate Each Year? If you're selling to retire, Diamond recommends doing retirement projections. "You may suddenly have a million dollars. It seems like a ton of money, but you have to be sure that you won't outlive it." Here's how the math works: Say, you're 55, and you have a million dollars to invest from selling your company. "People think you can take out 8-9 percent of your investment each year without worrying. It's more like 4-5 percent. If you have three million dollars, you can take out as much as $150,000 without losing ground."
What Are Your Expenses? "Most people truly have no clue. The common denominator between the rich and the poor is that they grossly underestimate what they spend." You need to figure this out. Beyond recurring bills like mortgage, credit cards, utilities and the like, it's helpful to write down every penny you spend for a month or two.
Once you know how much cash your investments can generate annually, and how much money you need, you're ready to work with a financial planner to create a portfolio of investments that will give you the growth and income you require. Here are some important considerations.
Evaluate Paying Down Your Debt "People say my mortgage is a tax write-off, but sometimes it isn't, depending on income and phase-outs. I tell my clients, 'Let's look at your debt, and see what it makes sense to pay off.'"
Consider What You'll Spend on Health Care "The big wild card is health care. I work with a lot of middle-age clients who have to plan for routine health care, as well as long-term care. The average couple who goes on Medicare at 65 is still spending $10,000 to $12,000 a year in out-of-pocket costs – Medigap insurance, deductibles, copays, prescriptions, dental, vision. I tell clients to put $12,000 to $15,000 in a health care account every year."
Think Twice Before Giving Your Money Away You have to look hard at gifting. "People get the money and it seems like so much. Everybody has their hand out; people come out of the wooodwork. You want to make charitable donations. I say take it slow. See how much you'll need to live on before you do begin making gifts," Diamond says, observing that it's tempting to make charitable gifts right away because the deduction can help offset the windfall from selling your business. "You have to look at the financial planning first. You can't let the tax tail wag the dog."
Structure Your Portfolio For a Long, Long Life You've figured out what you need, say it's $10,000 a month. Now you need to structure your portfolio to generate that income, with enough growth built in to guard against inflation. "I do financial plans to age 100. I usually use some annuities, dividend paying stocks, bonds, life insurance. Then you have to review it every year."
Adjust Quickly When the Market Slides "What if we have a big down year like 2008? If you're taking 5 percent and your portfolio drops 30 percent, you should now be taking 5 percent of the reduced amount. A lot of people got in trouble by continuing to spend at the same rate. You have to tighten your belt, have discipline."
Work As a Team If you're a couple, that's key to success. "When people don't, I've seen marriages break up over it. I had a couple with a big drop in income. I thought, What a disaster. But they figured it out, working as a team, and the experience actually strengthened their marriage. Both people have to participate in financial conversations."
Bottom Line You have to look for the holes, what could go wrong. Debt is the biggest thing to ruin plans. Or not having an emergency fund. Or not planning for health care. Usually getting in trouble is a result of one of those three things," Diamond says.
Diamond's firm, SS&G Wealth Management, offers financial planning, including how to insure financial stability for people who are planning to sell a small business.
