Q. I am nowhere near ready to exit my company why would, could or should I divert valuable attention to this issue when there are so many others clamoring for my valuable time now?

A. Because I’m going to need income from assets when I exit my company. I’ll no longer have a salary and so my assets must produce my income. Regardless of whether my kids, my employees, an outsider takes over the business or I shut the company down, I’ll need income. When I do there must be assets to produce the income needed to live on. Some of the decisions that I make years before I exit will have a direct and dramatic affect on the income I have after I exit my company. The thought that I’ll plan my exit six months before I exit will leave my money on the table for someone else to capture.

Options, Options, Options.

Whenever we talk about exit planning with someone, we want to preserve as many options as possible while making decisions that need to be made. Options improve negotiating position. If I have no options, if the decision is made for me by my circumstances, then my negotiating leverage is gone. This is key in exit planning, because the ability to produce income without selling my company means that I can negotiate a better deal when I do sell my company if the transaction is with an outsider. Ability to produce income is also important when kids or employees are the ones who will own and run the business after my exit, because it builds flexibility and protection FOR ME into the transaction with kids/employees.

Without some advance planning when I exit, my salary and bonus package will come to an end. In certain situations I run the risk that continued salary after my exit will be considered a dividend. Under current dividend tax rates this is not as bad as it once was. However, it’s possible dividend treatment will still result in corporate tax and personal tax albeit at a reduced personal rate currently. Essentially my salary will come to an end at exit or shortly there after. Here are a couple issues where I make decisions long before I exit that can provide substantial income when I do.

Buildings

Every business needs someplace to work from. At the beginning of the internet craze, the mantra was buildings were no longer needed. All you needed was a web site. While this is true for some distribution and retail businesses, manufacturing businesses and in particular circuit board shops need a building. Should you buy, (or build) or lease?

Leasing reduces capital requirements, but puts me at the risk of interest rates, inflation, availability, and the whims of a landlord. Buying a building requires capital in some form either through equity or debt. For closely held businesses in some parts of the country, asset based financing is the only option available. A building purchase is a way to secure financing for the business.

Extending the concept further, if I buy a building personally or in an LLC that I own, then rent the facility to the business, my rent goes towards paying down debt on as asset increasing in value, where the rent will likely go up over time and is ultimately paid to me. Then, regardless of when I exit, the new owners may rent the building from me to continue the business operation or I will have an asset that can be rented or sold to someone else to produce income for me. Furthermore while I am active in the company and earning a salary the building may be a source of tax advantage to me.

Owning the building can be used to generate income with or without the business.

Retirement plans

For many company owners retirement plans mean another gift to employees. Because of the way many plans are designed and sold many owners don’t really benefit from their existing plans, and worse are committed to a large matching contribution to entice employees to participate. This need not be so and in fact, leaves you and me at risk.

For starters the law permits contributions to be made up to 25% of pay or $41,000. If you think of $40,000 growing at a reasonable rate over the 20 average life of business ownership, we’re talking about an account with $2,000,000 of liquid assets in it. That’s the ability to generate substantial income to enhance negotiating position. That’s the ability to generate income to give children or employees time to arrange financing. That’s income that the company produces over my lifetime in the business that accrues to me on top of what I sell for.

Now for some companies this won’t work because for reasons related to employee age, compensation and tenure it costs a large amount of money in the form of contributions to employees to get $40,000 contributed for owners. But in many cases it costs a fraction of the tax savings achieved by the plan, to make the contributions required for employees. In these cases, making retirement plan contributions are a very valuable use of tax-deductible funds that enhances every aspect of the owner’s exit. It’s important to run numbers to see what the circumstances of the company will permit and then decide from there.

What we learn is that business decisions during business operation play a key role in successful exits.