This marks the third article in BaldwinClarke’s new series: Selecting a Business Retirement Plan. Early articles introduced key concepts, while later pieces highlight specific plan categories. This article focuses on flexible retirement plans.
Business owners might deduce a few takeaways from earlier articles. Retirement plans have evolved considerably in recent decades, more plans are available to businesses than ever before, and plan selection involves many factors. Armed with this context, owners can now review individual plan designs. This article highlights a popular subcategory: flexible retirement plans.
Economic tides are inherently volatile. Even the most stable businesses encounter rising costs, employee turnover, and supply and demand pressures. Other risks are unpredictable but no less impactful. Businesses that persevered through the 2008 Recession and COVID-19 Pandemic can attest. Still, private enterprise proves resilient time and time again. Sustainable businesses strike a careful balance between tenacity and risk management.
Annual profits are the lifeblood of companies. Thin margins dictate important decisions, such as whether to hire or fire, expand or cut back, pay bonuses or retain earnings. Sales are particularly difficult to predict in retail and service-oriented industries. Surprises occur irrespective of business models and revenue forecasts. Companies are understandably hesitant to extend additional commitments in an uncertain world.
Certain retirement plans suit dynamic circumstances. These plans have flexible funding requirements, allowing businesses to make contributions at their discretion. This arrangement also aligns employee incentives with those of the company, as research shows that employees perform best when there is a corresponding payout. The following sections focus on four common options: Profit-Sharing Plans, 401(k)s, Stock Bonus Plans, and Employee Stock Option Plans (ESOPs).
If you are an owner or operator of a business, or a family member going through some level of estate planning, chances are you will need to understand and/or document the value of a business or business interest. Given that the preponderance of businesses out there are privately held, there is no immediate mechanism to easily ascertain the value of an ownership interest. As such, business valuations are needed to gain such understanding.
But what are business valuations? Why would you need one? And practically speaking, how do you go about getting one? Unless you went to school for finance, or have been through the process before, the answers to these questions may not be top of mind.
For a baseline, let’s jump into the What, Why and How of business valuations.
The What:
A business valuation, also referred to as a business appraisal, is a process used to estimate the economic value of an owner's interest in a business – valuing either 100% of the outstanding equity or a percentage of the whole. A valuation provides a measure of the company's worth based on a variety of factors such as its financial health, cash flow, market conditions, balance sheet characteristics, and potential for future growth.
Equally as important as the factors listed above, a valuation also incorporates, and is highlight sensitive to, the assessment of risk. Naturally, one would think a highly profitable company would be worth a lot, but if that profit is highly speculative (for whatever reason), value will be invariably subdued. Put another way, the risk input in a valuation can be either a catalyst or governor.
Business retirement plans are tax-deferred savings vehicles for owners and their staff.
We introduced readers to the complex world of employer-sponsored plans in Article 1 of this series.
This installment offers a decision-making framework for business owners.
Many retirement plans are available to business owners. The number of options can be overwhelming. Stringent regulations and recordkeeping requirements introduce an added layer of complexity. Fortunately, a systematic approach makes the selection process more manageable.
Plan adoption involves several interrelated steps. Goal setting is perhaps the most important action. This requires the company to decide who will participate, which party(ies) will contribute, and how much it would like to provide. By defining clear objectives, the owner can form a list of plan options. Next, businesses should review the responsibilities and costs associated with each option. Companies then choose a plan that best meets their criteria. Once a selection is made, owners prepare documentation, select investments, and implement the plan.
This article provides a decision-making framework for business owners. In reality, companies typically leverage outside professionals throughout the process. Investment professionals, third-party administrators, and attorneys all offer important services in this area. Regardless, an informed business owner is also a judicious one. A knowledgeable plan sponsor can mitigate costs and avoid headaches.
BaldwinClarke offers over fifty years of business planning experience. We proudly serve as a consultant and advisor for plans of various sizes. Our methodical process prioritizes education and objectivity. This fosters trust and allows business owners to focus on what they do best.
Qualified Plans are a category of employer-sponsored retirement plans. They meet specific federal requirements as outlined in the Employee Retirement Income Security Act (ERISA) of 1974. Designs vary in form and function, but all qualified plans share two characteristics. Plan contributions are eligible for immediate tax deductions.
Plan assets grow tax deferred until retirement. Strict rules accompany unique tax benefits. Regulations prescribe eligibility standards, vesting limitations, contribution limits, and required minimum distributions (RMDs). Employers with qualified plans also retain fiduciary liability. Businesses can manage fiduciary responsibilities by hiring specialists, such as Third-Party Administrators and certain Registered Investment Advisors (RIAs).
