Small business owners focus most of their energies on starting, running, and growing their businesses. Some do not plan to retire, but others assume that at some point they will retire … and, of course, they will die.

Unfortunately, according to a study, nearly 40 percent of owners don’t have a retirement income strategy; they assume the proceeds from the sale of their business will provide them with financial security. This is so even though only half of all businesses have had any appraisal within the past three years.

Assumptions and lack of action can undermine a secure retirement or cost heirs dearly. There are important things to do before you retire. Below are some actions to take – now.

1. Get an Appraisal of Your Business

How do you know whether your business is worth what you think it is? The only way to know for sure is to get an expert appraisal. Appraisals can be pricey, but are necessary if you want to start a gifting program for your interests as part of an estate planning strategy (explained later).

2. Decide What Will Happen to Your Business When Something Happens to You

Even if you make plans for retirement, disability or death may suddenly intervene. What happens to your business if you can no longer work? What happens to the business when you die? Do you want co-owners to carry on without you? Do you have children or key employees ready to step in? Give these questions thought so you can craft plans to implement your answers.

3. Sign a Buy-Sell Agreement

A buy-sell agreement is a legally binding contract among owners, or among owners and the company, that ensures business continuity despite changes in ownership. According to the survey referenced earlier, only 44 percent of business owners have buy-sell agreements to spell out what happens when a contingency — retirement, disability, divorce, personal bankruptcy, death—occurs.

Buy-sell agreements can have a valuable estate planning benefit: If the agreement is made at arms’ length and fixes value, it can be used for estate tax purposes, provided that no party can unilaterally make any change.

4. Create a Succession Plan

A comprehensive succession plan contains both lifetime and post-death actions to transition business ownership to your children or others. The plan is comprised of a variety of actions:

• During life. Actions include signing a buy-sell agreement discussed earlier. For those with estates valued at more than the federal estate tax exclusion amount ($5.43 million in 2015), tax-saving strategies, such as lifetime gifting of business interests, may be warranted.
• At death. Make sure your will and any trusts you’ve set up reflect your succession planning intentions. For example, if you have two children and want ownership to pass to one child, be sure that the family understands your intentions and that you’ve provided other property to the child who does not inherit the business. Be clear to avoid any family disputes that can lead to lengthy and costly litigation which decimates family wealth. Case in point: Famed jeweler Harry Winston’s two sons fought for decades over financial interests in the company, costing more than $10 million in legal fees and much more in family acrimony.

5. Fund Your Succession Plan

Deciding who inherits what or whether co-owners accede to your interests is only part of the planning process. You have to make sure that you provide the means to put your plans into effect.

For example, say you have a partner and agree that she can buy out your interest when you die, and you address valuation in a buy-sell agreement reflecting your understanding of what will happen at death. Be sure to have sufficient insurance to cover the cost of this buyout so your heirs are protected. The survey found that only half (52 percent) of existing buy-sell agreements are funded with life insurance; only 5 percent are funded for a disability buyout.

Conclusion

Focusing on your business is great, but it may be time to focus on yourself and your family. Meet with a knowledgeable estate planning attorney to address succession plans that satisfy your needs and take care of these things to do before you retire.