Ten Steps to Effective Succession Planning Step Three: Determine Your Retirement Cash Needs


There are a lot of bases to cover in developing an effective and comprehensive succession plan. To help you address all important considerations and contingencies, the HBK Dealership Industry Group developed, "Ten Steps to Effective Succession Planning." This article addresses the third step in an effective succession plan, determining your retirement cash needs.

The optimum succession plan calls for relinquishing ownership and management responsibility prior to death, but owners are often reluctant to retire due to concerns over how to adequately maintain their desired retirement lifestyle. The concerns are amplified in situations where the dealership provides for major ongoing expenses, such as a company car and healthcare insurance. So a major consideration in succession planning is determining the ongoing cash needs of the retiring owner and how they will be funded. Even if you do not plan to retire, a contingency plan should be in place to address those issues should you have to surrender ownership or management due to a disability or other unplanned circumstances.

There are many vehicles used to provide retirement cash: consulting agreements, payments related to a non-compete agreement, deferred compensation plans, etc. As the surrendering owner, you might also maintain dealership assets, for example, the real estate which would provide for ongoing rental payments. If the transfer involves a sale, you might use a seller’s note whereby the proceeds are delivered over time. Those agreements need to consider such items as interest and length of agreement, and before entering into one, the reliability of the new owner.

Some funding mechanisms are more or less appropriate when ownership is being transferred within the family. An arrangement we developed recently for a dealer with few assets other than his business involved an income and estate tax-conscious combination of gifting and selling to his son. The retiring dealer will be paid through deferred compensation and rental payments on the real estate. The deferred compensation agreement also included a survivorship clause, which provides for ongoing payments to the dealer’s wife, the son’s mother, if the father is first to die.

To determine your retirement cash needs:

  1. Quantify the amount needed to fund your desired lifestyle. Recognize that, with the exception of fixed payments like a mortgage, you need to adjust for inflation. Even a small amount of inflation will have a significant impact on the value of money over time: for example, just 3 percent annual inflation means you will need $1,340 ten years from now to cover $1,000 of today’s expenses. Be sure to include costs being covered by the business, such as the company car, insurances, country club membership and so on.
  2. Offset the total cash needs figure with amounts from sources other than the business, such as IRAs, Social Security and other investments, again with adjustments for inflation and interest rate risk. Typically retirement will also involve reshaping an investment portfolio to a less risky position, say, more bonds than stocks.
  3. The difference between the funding you will receive from other sources and your retirement needs is the minimum amount of cash that will need to be provided by the dealership sale or as part of the transfer agreement.

Rex Collins is a Principal at HBK CPAs and Consultants. He directs HBK’s National Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com; or by phone at 317-504-7900.

About the Author(s)
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.