STEP 2: Base Your Income on Your Post-Transition Plans
Now that you’ve developed a realistic vision of your financial needs and life goals, you can structure a compensation plan to make that vision a reality.
If you’re passing your company to your heirs prior to your passing, your compensation after the transition will depend largely on your savings—from salary, bonuses, retirement and other benefits that you’ve established over the years. Another potential source of compensation: You could negotiate to retain an equity stake in, or other tie to, the company once your successors take over. If you’re selling the company, your compensation can be structured in several ways. For example, you could:
- Receive the sale price in one lump sum. (Bear in mind that most small business owners don’t receive full payment up-front. Many transactions are structured so that part of the payment is deferred or paid as equity in the buyer’s company.)
- Hold an installment note that states that the buyer agrees to pay you set amounts over time.
- Retain ownership of key real estate or equipment and lease it back to the buyer. This can provide you with additional income after the sale.
Food For Thought…
If you’re not getting full payment up-front, ask your accountant or lawyer to thoroughly investigate the buyer’s finances and history. Understand that if you hold a note for part of the sale price and the buyer encounters financial problems, you might have to compete with other creditors for repayment. In such cases, there are different classes of creditors; be sure that you are in the secured creditor class—that the debt to you is secured with some kind of valuable collateral.