Do You Have a Succession Plan?

You’ve built a successful real estate business; now it’s time to plan a smart exit strategy. Here are three tips for getting started.

February 6, 2015

There is no expiration date stamped on the soles of our feet, says Charles G. Byron, a financial adviser at Trusted Global Advisors in Ewing, N.J. And many real estate professionals are entrepreneurs — entrepreneurs tend to be optimistic by nature.

But as we know, life has a way of forcing one’s hand.

About 10 years ago, Byron watched as a successful, seemingly healthy business owner learned he had stage-four throat cancer after a routine physical. Despite the diagnosis, the man had his finances in order.

“This made it possible for him to focus on getting well and confront the condition head-on. He was able to undergo aggressive treatment and has been cancer-free for years,” Byron says.

If a succession plan did not make your list of resolutions for 2015, don’t worry. Byron says it’s never too late to plan a smart exit from your business. Here are a few points to get you started:

Know What Your Business is Worth

While it may never have crossed your mind that your real estate business has a value to someone else, it does. So know the value of your real estate company and its assets: clients and customers, support staff and salespeople, current inventory and pending transactions, brand name and reputation, and leasehold improvements.

To get a valuation, contact a financial planner. To view five valuation methods, visit “What’s Your Business Worth.”

Pick a Successor

If your exit strategy includes retirement, identify someone or several people to take over your company. Identify what it means to be the successor. Make sure the person wants to the job. Select an exit date — by age 70, for instance — and include steps (consulting for 90 days after a transfer of ownership to support the transition, for example) to be taken before and after exiting. Make sure the strategy moves beyond retirement and addresses transition in the event of disability or death.

To minimize stress on any successor, Byron’s advice is to identify dates and triggers (disability, death, retirement) for a buy-sell agreement and a funding mechanism (life insurance) to support the transfer of ownership or sale.

Fund the Future

A buy-sell agreement is not automatically funded. The valuation step mentioned earlier will help you purchase the right amount of life insurance to fund a buy-sell agreement. If it is structured correctly, a buy-sell agreement could be funded through permanent life insurance and pay the policyholder (the successor) in the event of the previous owner’s disability, death, or retirement.

Moreover, a permanent life insurance policy funded on a regular basis by the successor could pay off the retiring principal and preserve an income tax–free death benefit for the policy owner (successor), Byron says.

“You have to ask yourself if you want life insurance to strictly fund death or to become a lifetime funding method to accumulate cash for a buyout,” he says.

Planning to retire? Visit REALTOR® Magazine’s Retirement Planning Tool Kit for more in depth help.

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