Are You Extracting Enough Cash From Your Business?

September 28, 2021

All business owners exit their business at some point – either on their own terms or someone else’s.

Obviously, you want to leave on your own terms if you can. That takes planning.

And one of the most important things you can do as a business owner to operate on your own terms is to consistently pull cash from your business in a tax-efficient manner.

But guess what?

Most business owners aren’t doing it because they don’t know how. In this week’s blog, we are digging into how you can consistently pull cash out of your business in a tax-efficient way so that when the time is right, you can exit your business on your own terms.

Here’s How, and Why It’s Important

A well-designed retirement plan is the best way to pull cash out of your business in a tax-efficient way. Unfortunately, one of the biggest planning mistakes we see business owners make is not having a sophisticated retirement plan design. Unless those owners have a lot of liquid wealth outside of their business, this planning mistake likely means they won’t be able to call the shots when it comes time to exit.

As a business owner, the savings you build in a retirement plan is what will transition your wealth from an illiquid asset (your business) into a liquid asset (a diversified investment portfolio) that will grow over time. This portfolio, if well-managed, will be the tool that allows you to call the shots about when, why, and how you eventually transition from business owner to your next chapter, whether that is retirement or something else.

If you are a business owner and you don’t yet have a sophisticated retirement plan in place, here’s what you need to do to make sure that you’ll be calling the shots for your business and your future on your own terms:

Assess your cash extraction strategy

If your business doesn’t have a retirement plan, your strategy for extracting cash likely isn’t robust enough.

You could, and should, be saving more.

If it does have a retirement plan, you want to understand if the plan you have in place is allowing you to contribute as much as possible. In either case, you’ll want the opinion of a credentialed retirement plan design specialist (see below).

There are many ways to design a retirement plan. The design impacts how much you can contribute each year, how much you’re required to contribute for other employees, and how much it costs to implement and maintain the plan. At a high level, defined contribution plans allow you to contribute as much as $58,000 per year (or $64,500/year if you are over 50). Defined benefit plans may allow you to contribute more depending on your income or your age. But there are trade-offs to consider.

Our free resource, Should I Set Up A Traditional 401(k) For My Business (click the thumbnail below), uses a series of yes or no questions to help you get an idea of the type of retirement plan that may work for your business.

Get an opinion from a retirement plan design specialist

Many business owners think that their CPA will cover retirement plan design. They might. But don’t be surprised if they don’t have that specific expertise. You want to talk to someone that has extensive experience designing plans for business like yours. Look for someone who is a Certified Pension Consultant (CPC), an Enrolled Retirement Plan Agent (ERPA), or a Tax-Exempt and Government Plan Consultant (TGPC).

How do you find someone that can help?

Similar to the process of finding a business appraiser or valuation specialist (read our recent blog, What Is My Business Worth?), often the best approach is to get a referral. The reality is that business owners require a host of advisors with varying areas of expertise. Any of your existing advisors can likely refer you to someone with extensive retirement plan design experience.

At Heritage Financial, many of our clients are business owners. Over the years, we’ve built a network of professional advisors, including retirement plan design specialists, that advise business owners. If you need a referral, contact us.

Make sure you have a financial plan

Building up cash in your retirement plan is the first step to eventually exiting your business on your own terms. An equally important step is making sure the cash you are setting aside is developing into the nest egg you need to make the transition.

  • Do you know how much liquid savings you’ll need in the future to exit your business and still maintain the lifestyle you are accustomed to?
  • Are you on track to have as much as you’ll need through saving and investment growth?
  • Do you know how taxes will impact your finances once you exit your business?

These shouldn’t be questions that you guess at. Even if you aren’t planning on exiting your business any time soon, why wouldn’t you want to know that you are on track to do it at the time of your choosing, whenever that may be?

Work with a comprehensive wealth management firm that can bring all the financial pieces of your business into a single clear picture of the degree of control you’ll have over your eventual exit strategy. Get peace of mind that the work you are doing today in your business is translating into a future where you call the shots.

Next Steps

Check out the resources we’ve been compiling for business owners:

Register for our upcoming webinar: Is the Window for Selling My Business Closing?

Hear Heritage Financial’s President, Sammy Azzouz, and Greg Rush of investment bank Dunn, Rush & Co. discuss the impact of the pandemic, changing tax laws, and higher potential interest rates on what has been a seller’s market for business owners. The webinar takes place on Wednesday, October 20th at 11 AM EST. Register even if you can’t make it live, and we’ll be sure to send you the replay.

And of course, if you are ready to start getting a clearer picture of how your business fits into your overall financial plan, contact us.

Kristin Castner, CFA

Kristin Castner, CFA

At Heritage Kristin is responsible for overall marketing strategy, with a focus on communicating the firm's message to clients and prospects and creating outreach programs to engage clients, partners and prospective clients.

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