With inflation reaching 40-year highs, investors are eager to find investments to hedge against the decreasing value of their money. Multifamily real estate can provide opportunities for investors to protect themselves against their declining purchasing power.
Before we dive into how investors can turn to multifamily real estate to navigate these changes, let’s begin with why inflation and rising interest rates are occurring in the first place.
The Fed’s Shift from Quantitative Easing to Quantitative Tightening
In 2020, the Federal Reserve began quantitative easing (QE) to encourage investment and spur economic activity. In this process, the Fed expanded its balance sheet.
These expansions included committing to purchasing:
$80 billion a month in treasuries, and
$40 billion in mortgage-backed securities
In June 2022, however, roughly two years after the quantitative easing plan was announced, the Federal Reserve began quantitative tightening (QT) to counteract inflation.
The quantitative tightening process includes allowing its purchased bonds to reach maturity and run off its balance sheet, which results in rising interest rates. Inflation is still heavily prevalent in the American economy. In fact, in Q2 2022, inflation sat at its highest point since 1982.
Why does this matter? Inflation can erode the value of an investor’s assets and negatively impacts the ability to purchase goods.
This considered, investors are looking for opportunities to shelter from inflation. Enter multifamily real estate.
Using Multifamily Real Estate as a Hedge Against Inflation
Multifamily real estate can serve as a hedge against inflation and be an attractive option for investors for several reasons, including that multifamily real estate:
Has Intrinsic Value
Recovers Quickly
And more
Let’s discuss more below.
Multifamily Real Estate Has Intrinsic Value
Multifamily real estate is a necessity-based asset. To put it simply, residents need a place to live. Further, residents experience friction, such as time, cost, and effort if they are to move.
These factors suggest that multifamily real estate holds an intrinsic value and can lead investors to stable or potentially increased cash flow, despite inflation.
Demand for Multifamily Real Estate is Rising
Multifamily homes are becoming increasingly popular. Why? According to research, Millennials are moving into homes later than the Baby Boomer generation prior. Moreover, Millennials are still experiencing the effects of the recent2 020 financial crisis.
Additionally, Generation Z is entering the workforce with record low savings rates. This suggests most Gen Z will not be putting a down payment on a single-family home anytime soon, and will be more likely to choose multifamily housing.
Multifamily Real Estate Supply is Stagnant
Inflation typically results in price increases for construction. As a result, many development projects are postponed or delayed. These delays can decrease new supply, make new homes more expensive, and lead to a rise in demand.
Rent Rate Raising Due to Inflation
Rent rates across the nation have continued to trend upwards, climbing year over year. The average rental rate for a one-bedroom apartment is up 26.5% and two-bedroom apartments are up a similar 25.7%.
Rent raises allow investors to combat the effects of inflation.
Multifamily Leases: Short Enough Hedge Against Inflation
Multifamily leases typically last no more than 12 months.
This allows landlords to increase rents to coordinate with the annual rate of inflation. These increases can help real estate investors stabilize or potentially increase cash flow. Additionally, their multifamily investment appreciates in value.
Multifamily Real Estate Recovers Quickly
Investors often view multifamily real estate as “inflation resistant.” Why? This form of investment doesn’t typically drop in value as much as other assets during challenging market times. Additionally, multifamily real estate tends to recover faster than other investments.
For example, during the COVID-19 pandemic, the demand for other assets, such as office and retail buildings, dipped. However, the demand for multifamily real estate remained high. Short leases allow investors to utilize this demand and adjust rent raises.
Tune Into Our Podcast to Learn More
In Episode 57, Chris Osmond speaks with Paul Kaseburg, Chief Investment Officer of MG Properties, about investment opportunities in the multifamily real estate market and how they help you cope with rising inflation rates.
The discuss:
How real estate, in general, responds to inflationary pressures
The advantages of multifamily over other types of real estate investments
Latest trends in cap rates and cost of debt that real estate investors should know about
How inflation is impacting the affordability gap between single-family homes and apartment renting
At Centura Wealth Advisory, we are dedicated to our role as stewards in leading our clients to purposeful financial planning and investing strategies to ensure their success.
One of our goals is to help our clients navigate and understand challenging economic changes, such as the current rising interest rate environment and inflation.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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Taxpayers, especially high-net-worth individuals, commonly experience the issues of high-income taxes and wealth transfer taxes in their financial planning.
Charitable lead annuity trusts, or CLATs, help taxpayers tackle these issues through advantages including tax deductions and wealth transfer planning.
Below, we’ll discuss:
How charitable lead annuity trusts (CLATs) work, and
How taxpayers can implement a grantor charitable lead annuity trust (G-CLAT) to experience both long and short-term tax benefits
What is a Charitable Lead Annuity Trust?
A charitable lead annuity trust (CLAT) is a charitable trust in which a charity, donor-advised fund, or a foundation that the grantor selects, receives annual payments. These payments may be set for a term of years or for the grantor’s lifetime.
At the end of this period, the remaining CLAT assets are distributed amongst the trust’s non-charitable beneficiaries. These beneficiaries are typically the grantor’s descendants or trusts for the descendants’ benefit.
What is a Grantor Charitable Lead Annuity Trust?
In a grantor charitable lead annuity trust (G-CLAT), the trust corpus remaining at the end of the term is given back to the donor instead of the donor’s descendants.
Does a Taxpayer Need Donative Intent to Implement a G-CLAT?
A taxpayer does not need donative intent to implement a G-CLAT.
In fact, taxpayers can utilize these trusts for a variety of purposes. Let’s review how G-CLATs work and their advantages.
How Does a G-CLAT Work?
Let’s take a look at G-CLAT mechanics. We like to break it down like this:
1. Grantors fund CLAT with a one-time deposit
2. The taxpayer implements a pre-determined annual charitable payment schedule
3. Grantor(s) receive income tax dedication to be used up to six years – likely at 99% or more of the deposit
4. All taxable events flow back to the grantor(s)
5. Invest in Limited Partners real estate
6. If structured properly, the remainder interest transfers to the remainder beneficiary, free of estate tax
What Are the Benefits of G-CLATs?
The advantages of implementing a grantor charitable lead annuity trust include, but are not limited to:
Income tax planning
Wealth transfer planning
Charitable planning
Let’s speak about each of these in a bit more detail.
Income Tax Planning
Taxpayers will experience the benefits of both immediate and long-term tax benefits once they’ve successfully implemented a G-CLAT. The trust, for example, will result in an immediate income tax dedication for the taxpayer, which is a present value benefit.
This immediate income tax reduction is:
Subject to 20 to 30% of adjusted gross income (AGI) limitation
Able to be utilized over six tax years
Ideally consumed at the highest marginal income tax rates
Wealth Transfer Planning
In addition to the immediate benefits of G-CLATs, these trusts also include wealth transfer tax savings. Through these savings, the taxpayer can experience the benefits of a G-CLAT for years.
Charitable Planning
While the taxpayer does not need to have donative intent, charitable planning benefits G-CLATs if the taxpayer decides to participate.
For instance, as a future benefit, G-CLATs provide satisfying charitable annuity payments with appreciated assets, avoiding recognition of gain on these distributions to 501(c)3s.
How to Get Started
At Centura Wealth Advisory, we know the minute details of how to optimize a grantor charitable lead annuity trust or a charitable lead annuity trust. In fact, our team has successfully implemented over 280 CLAT transactions.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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At Centura, we are dedicated to our role as stewards in leading our clients to purposeful financial planning and investing strategies to ensure their success. One of our goals is to help our clients navigate and understand challenging economic changes, such as the current rising interest rate environment.
Listen to our podcast, Live Life Liberated, for a detailed discussion from Sean Clark and David Cariani as they outline financial planning and investment strategies to help you cope with rising interest rates.
What is a Rising Interest Rate Environment?
In 1981, interest rates peaked at about 16%. For the next forty years, interest rates trended downward steadily and reached a low during the COVID-19 pandemic at about .05%. Rates currently stand at a little over 2.5%.
The rising interest rates cause the borrowing costs for both individuals and businesses to increase. This rise will result in a slowdown in economic activity because businesses will be less inclined to borrow money unless they are certain they will be able to earn more money than they paid to borrow.
This rise in interest rates will lead to what Sean and David call a “dampening in economic activity, both on a micro and macro level as the cost of capital increases.”
Who Does a Rising Interest Rate Environment Affect?
From a planning perspective, a rising interest rate environment affects anyone who is considering estate planning for estates that are at, near or above the estate tax exemption threshold or those who earn a high income.
From an investing perspective, the rising interest rates affect investors who own assets and/or traditional fixed-income investments like bonds.
How Does the Rising Interest Rate Environment Affect Planning?
In financial planning, interest rates are used to determine the economics of different strategies. Rising interest rates will have implications on a wide range of strategies and will cause the hurdle rates on those strategies to increase.
As a result, financial planners may need to pivot to new solutions that will be better suited for a high-interest rate environment.
How Does the Rising Interest Rate Environment Affect Investments?
The primary risks of a rising interest rate environment include the potential for a loss in principal value as well as a loss of buying power.
For example, in the current inflationary environment, if an investor’s earnings are 2.5% and prices are increasing significantly–approximately 6-7%–the investor will have 4.5% less buying power at the end of the year than they did at the beginning.
Additionally, short-term bonds are less sensitive to the increased rates of a high-interest rate environment than longer-maturity bonds. Longer-maturity bonds may lock in rising rates for longer-time periods whereas shorter-term bonds require a shorter commitment to the high rates and will allow investors to move on to better opportunities.
Alternative Investments to Consider Over Traditional Fixed Income
Private Credit
Investors may enter private credit investments because of their floating rate loans, which will limit the interest rate risk associated with other forms of investment, such as traditional fixed-income investments.
Life Insurance
Life insurance can be a powerful vehicle for alternative investments. It provides downside protection, high liquidity, and an attractive upside potential relative to investments with a similar risk profile.
Check out episode 31 of our podcast, Live Life Liberated, to learn more about how life insurance solutions can be used as an alternative to fixed-income investments.
Structured Notes
Structured notes, written by high credited banks, are customizable and well-suited for a rising interest rate environment and can help investors maintain returns. For more detail, listen in to Episode 35 of Live Life Liberated, “Structured Notes Simplified with Robert Sowinski.”
Real Estate
Real estate can appreciate with inflation on a long-term basis and prove to be a tax-efficient investment. According to Forbes, “real estate investments have the characteristic of performing well in a rising rate environment. In particular, income-generating real property and multifamily have historically…shown a greater ability to grow net income during expansionary periods than securities and other assets.”
Listen in to learn more about the rising interest rate environment and how it affects financial planning and investing, or check out our blog for more information, such as how Centura can help you liberate your wealth.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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Financial management is a process by which an individual or an organization organizes and enhances its financial situation through strategies such as:
Investment management
Retirement planning
Tax planning
Estate planning
And more
Managing your financial portfolio alone can feel overwhelming. At Centura, we act as a financial partner to our clients, as we steward them toward the strategies that will work best for their unique situations. With that being said, we often use systems and processes to assist in the financial management process.
What are Financial Management Systems?
A Financial Management System (FMS) is the software and processes an organization uses to manage income, assets, and expenses. The FMS utilizes several functions to simplify financial management, such as maintaining complete audit trails as well as coordinating income statements, expense statements and balance sheets.
Further, a Personal Management System (PFM) performs similar functions to enhance the financial management of an individual or family, such as reducing accounting errors, maintaining audit trails, balancing checks, and automatically paying bills.
Why are Financial Management Systems Important?
Financial management systems and personal management systems are important because they secure long-term financial organization and efficiency. This organization will allow you to make fully informed decisions about your finances without being hindered by disorganized paperwork, accounting errors, or incomplete or inaccurate records.
What are Financial Management Processes?
Financial management processes are, in their simplest terms, plans and procedures which will help an individual, family or institution reach their financial goals. These processes can include a series of steps, such as:
Identifying financial goals
Gathering financial and personal information
Analyzing financial information
Developing a customized financial plan to achieve these goals
Processes can build an accurate and complete account of your existing financial situation through the meticulous collection of detailed financial information, identification of existing strategies, as well as the development of an understanding of your financial goals, values and desired outcomes.
You are in a Better Position to Plan for the Future
Going through a financial plan can unlock your “what-if” scenarios. Consider how your financial plan will change if:
You have to take care of your parents or family members
You or a member of your family are injured in an accident
You decide to become more philanthropic
The value of your stock drops
Your interest rates increase significantly
You decide to move
The college tuition for your child(ren) increases
Financial Management Processes Set You Up for Future Success
Regularly creating a financial plan can help you analyze your baseline, goals, existing strategies, and what-if scenarios. Through this analysis, you find what plan would best fit your needs.
At Centura, our advisors aim to understand not only your financial needs but also life events that may impact your finances. We work to create a relationship with you in order to guide you toward the best financial decisions.
It Helps You Keep a Pulse on Your Financial Performance
Implementing financial systems and processes that work for you is an essential aspect of analyzing your financial performance. Performing these processes on a regular basis allows you to make adjustments when necessary and gain a better understanding of your overall performance.
These regular adjustments ensure your plan is efficient, evolving with market conditions, and continues to align with your financial goals.
Interested in using financial processes to enhance your financial management but not sure where to start?
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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At Centura, we are dedicated to providing superior risk-adjusted returns and employing passive, active, and alternative investment strategies in our portfolio designs for our clients. As per our investment philosophy, our goals are to:
Build diversified, cost-efficient portfolios
Integrate alternative investments
Implement tax mitigation strategies
We believe that to achieve these goals, our role is to act as stewards for our clients through:
Helping them fully understand their investments and portfolios
Outlining their options
Providing purposeful strategies to ensure their success.
One of the tools we use to connect to our clients is our podcast, Live Life Liberated. It provides and breaks down relevant financial information in a detailed discussion geared towards our clients.
Concentrated stock can be defined as “the holding of a single stock that represents 10% or more of your overall portfolio.”
Those who may find themselves in a position of high concentrated stock include:
Founders of companies
Long-term executives
Long-term investors
Pre-IPO employees
Concentrated stock can “cut both ways” by bringing great fortune by increasing the total value of a portfolio as well as posing several prominent issues. These issues include but are not limited to:
A lack of diversification
Tax issues
Downside risk exposure
For example, Yahoo’s stocks peaked in 2000, benefiting investors with a concentrated position, before severely dropping a few years later and tanking the portfolios of investors.
Mitigating Risk with Downside Protection
While a concentrated stock position can prove to be a high-risk investment, there are strategies investors can employ to minimize this risk.
Options
Options can be used to mitigate downside risk exposure through hedging strategies that increase in value when the investments you are protecting drop.
Sean and David simplify this practice as “buying insurance to the downside of your position or giving up the upside of this position and [earning] income for doing that.”
Options can include:
Listed Options
Publicly Traded Options
Over-The-Counter Derivative Contracts
Equity Collars
The equity collar method includes “buying an out-of-the-money put option while simultaneously writing an out-of-the-money call option.” This combination provides downside protection for the owner because the put option gives them the right to sell their stock position at a given price in the future while the sale of the call option provides the investor with the income they can use to pay for the purchase of the put option.
Sean and David describe this flexible strategy as “giving up part of the upside to buy insurance for the downside.”
Exchange Funds
Owners can also choose to enter their stock in a non-taxable event, or exchange fund. An exchange fund is an arrangement or partnership between shareholders of different companies in which owners pool their large holdings of a single stock for exposure to a broader index.
Exchange funds allow the owners to:
Diversify their holdings while maintaining their concentrated position if they wish to hold onto their stock
Avoid taxes from capital gains
Use Gifting Strategies to Reduce Capital Gains Tax
Gifting to a Charity
An owner that has a highly appreciated stock with unrealized gains may benefit from a charitable gifting strategy. The owner collects credit for the charitable gift while the receiving organization gets the full value of the gift at the time it was given.
David and Sean break down this strategy in the following scenario:
If an owner has 30% basis and 70% gains and chooses to give away $100,000 of that to a charity, the owner can earn a $100,000 worth of deductions for their contribution without having to realize the $70,000 of gains. The charity can sell this gift in a non-taxable transaction and earn the full $100,000 of value.
Gifting to Family Members
An owner may also choose to give to a family member of a lower tax bracket in order to shift to a lower tax environment. While the family member will not be able to sell the gift tax-free, such as a charity can, they can potentially pay a significantly lower rate in taxes.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
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Net worth goes beyond searching for your favorite artists, musicians, and authors on Google to see how financially liberated they are. Hypothetically speaking, any individual could calculate their own net worth by counting their assets, debts, and liabilities.
But why would you do so? What value does knowing one’s net worth provide? In short, net worth is a practical tool that can help indicate a person’s financial health. This considered, let’s discuss how to calculate your net worth.
What is Net Worth?
Net worth is the value of all of your assets, minus the total of all your liabilities.
Why Is Net Worth Important?
At Centura Wealth Advisory, we unlock your wealth through innovative planning methods to find new pathways and change your wealth trajectory.
Net worth is a key tool in financial planning, especially when it comes to big life events such as mapping out your retirement strategy or purchasing a home or even a business. This figure reveals if your assets are worth more or less than what you owe, and can help predict how your wealth will grow or decrease over the course of your life.
How Do You Calculate Your Net Worth?
Formulaically speaking, calculating one’s net worth shouldn’t be all that difficult.
Again, net worth is the value of all of your assets, minus the total of all your liabilities.
Assets – Liabilities = Net Worth
It should, in theory, be a simple subtraction. However, the tricky part comes in when respectively calculating assets and liabilities.
One’s assets might include but are not limited to, an individual’s liquid and fixed assets, which might include a hodgepodge of:
Savings accounts
Checking accounts
Personal property (Real estate, automobiles, collectibles, jewelry, etc.)
Investments (annuities, bonds, cash value of life insurance policies, mutual funds, pensions, retirement plans, stocks)
A liability is any sum of money that you owe—whether it be to an institution, person, or bank. One’s liabilities might include, but are not limited to:
Mortgages
Student debt
Consumer debt
Personal loans
Auto loans
In an effort to make this process easier, we’ve created a free net worth calculator for your use.
The easiest, and most precise way to calculate your net worth, however, is to instead reach out to our team of stewards at Centura Wealth Advisory.
At Centura, we focus on generating excess cash flow to drive long-lasting wealth. Setting up your estate plan with one of our trusted advisors—so your cash flows exceed your standard of living—provides you with what we call Liberated Wealth®.
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At Centura Wealth Advisory, stewardship is at the core of everything we do. We believe in partnering with our clients to liberate their wealth management process. Part of our role as stewards is walking our clients through the entire financial planning process, from the present day to the coming years.
One of the main areas we address with our clients is their retirement plans. After a long career, many people dream of retirement. Whether it be spending your free time volunteering, making memories with your grandchildren, or sipping a piña colada on a tropical beach, one thing you don’t want to have to worry about is money.
In order to relieve this stressor, a lot of financial planning and coordination has to occur. Today, we’ve outlined your retirement checklist, and while it is not your one-stop shop for all of your retirement planning (we’d recommend reaching out to a trusted financial advisor for that), it does include the various elements to consider prior to leaving your career.
Your Retirement Expenses: Questions to Consider
There are many questions an individual, along with their trusted financial planner, can review in order to fine-tune the logistics of their retirement. The biggest question when planning for retirement is this: Have you saved enough to ensure you don’t run out of money during retirement?
In order to answer this question, you need to identify how much you can spend annually to ensure your funds will not be drained. Luckily, throughout one’s life, there are a variety of different retirement accounts you can save to trust accounts, 401(k), traditional and Roth IRA accounts, and so on.
Once you retire, certain expenses will be reduced, eliminated, and/or added. To further carve out your budget, ask yourself if:
You’ll be expected to financially support any family members
You anticipate going on any big family vacations or need a medical procedure
You might have any large one-off payments (for example, a wedding or car)
Your mortgage will be paid off
You will have to pay expenses that are currently being paid by your employer (i.e. medical and/or dental insurance, utilities, automobiles)
Consider all of these elements to help plan your expenses during this time.
Retired individuals typically have some form of retirement income (i.e. pensions, rental income) plus any liquid assets they’ve saved.
Tax Planning
Retirement tax planning, however, is a whole different story. You want to ensure that you can access your assets as tax-efficiently as possible.
Below are some questions to consider when identifying your retirement income.
How will you access your liquid assets?
When will you claim social security?
Do you have any fixed sources of income? (i.e. rental income, pensions, annuities, etc.)
Are there opportunities (Roth IRA) for creating tax-free income that you can access down the road?
What is the most tax-efficient method to asset your retirement assets?
What Will Your Retirement Look Like?
This is the fun part—deciding how you’d like to spend your time. As previously mentioned, there are many ways to spend your retirement: volunteering, spending time with grandchildren, sipping down piña coladas on a tropical beach, and the list goes on.
Many people, however, fail to recognize just how much time comes with retirement. For most, they gain 40 or more hours a week (when you factor in commuting) to do whatever they please.
Having some sort of structure for the weeks and days can be helpful—especially for those who felt their career was a large part of their identity. Consider the following questions when deciding what your retirement might look like:
Do you intend to travel? With family, friends, a partner, or alone? International or local?
Do you want to work? On what level? Will you volunteer or work a part-time job?
Are you planning to relocate? If so, in or out of state? Out of the country even? It’s important to consider how expenses and taxes in a different location than where you are currently might size up.
A Final Word
There are, of course, various additional factors and considerations when it comes to retirement planning; for example, asset allocation, loss of bonuses, your stock portfolio, and more. This article is just a jumping-off point.
There’s no article that could detail all these elements as precisely as speaking face to face with a trusted financial advisor like those at Centura Wealth Advisory.
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The general lifecycle of a business typically follows a few different stages. These stages include start-up, development and establishment, and finally maturity. As a business owner, once you’ve reached the maturity stage of your business, you are likely considering what the future of your company holds.
What will happen to your company when you retire? While planning to exit your business can be an emotional decision, it is also essential to the greater success of your business. What we have found, is that most business owners prefer to procrastinate on putting together a proper exit plan, which could end up being the reason your company does not succeed beyond your leadership.
Ideally, business owners start preparing their succession plan three to five years prior to their exit. This plan is in place to protect the company when the executive team is no longer available to serve their duties. When succession planning is rushed, hiring mistakes are more likely to occur, and the future of your business could be at stake.
In an effort to help you along this planning journey, here are a few tips to guide a successful succession planning process.
Assess Core Competencies in Alignment with your Business’ Strategy
First, take a look at your organization and work to identify the significant business challenges you may face in the next one to five years. Then, you can connect the positions that will lead to business continuity in the long run. In doing this, you’ll likely find the core competencies, skills, and knowledge that are critical to the success of your business.
Evaluate High Potential Employees
Once you have identified the positions and skills needed to continue your business, you can begin to consider who may take your place and the place of other leadership positions within your organization.
During this process, it’s important to account for your overall business strategy. Is the person you’re considering the right person to execute that strategy? What skills does this person need to drive this strategy forward?
Clear Communication with Stakeholders
As you go through the process of finding your successor, it’s important to include other key stakeholders within the business. Involving senior leadership and other members of the executive team to weigh in on whom they think is most qualified to take on this new role is essential to gaining their buy-in when the transition occurs.
Training Your Successor
Now, it’s time to communicate with your successor. Training your successor to take your place is of the most important steps in this process. Make sure they have enough time working with you to understand how the business operates, and how to grow the business from a position of strength.
Be sure to spend time with them during this entire process. Help them make decisions with your guidance, show them alternatives that they might not think of due to experience, and help them understand the risks associated with their decisions.
To go a step further, before you decide to leave your business, craft a strategic plan with one another. This helps ensure your successor is prepared and bought into creating a successful future for your business.
Potential Obstacles
Lastly, there are a few potential obstacles that you may run into during this process. These obstacles typically include timing, resistance to change, and lack of company support.
Timing
The entire succession planning process can be a time-consuming one. The time it takes to assess, evaluate, and develop your successor is not something to lose sight of. This is why it is typically recommended to start your succession planning at least three to five years in advance.
Not taking the time to develop this process can be detrimental to your company’s success. As we mentioned above, it usually leads to hiring mistakes, but it also has a large impact on your organization as a whole. If your successor is unprepared to take on this new role, your business will not be able to reach its full potential.
Resistance to Change
One of the reasons it is recommended to take three to five years to a succession plan is the impact it has on your people. Many people are resistant to change, especially as it relates to their careers.
Preparing your successor over time, allows the rest of your organization to familiarize themselves with the new leadership style they will be experiencing. Which leads to greater buy-in, and an easier transition overall.
Lack of Support
Similar to the point above, during any business transition, you will likely have naysayers, skeptics, and resistance. Most of these issues stem from the emotions that arise when people are concerned that their job is at risk. A simple way to mitigate this issue is to communicate as frequently and transparently as possible.
Aside from succession planning, there are other factors that go into exiting your business. For you, that may mean selling your business. How can you begin to prepare to sell your business a few years down the line? Take a look at one of our recent articles to get you started.
https://centurawealth.com/wp-content/uploads/2024/08/SuccessionPlanning.jpg13102289centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2022-05-02 16:34:002025-04-08 16:37:38Four Methods for a Successful Succession Planning Strategy
As you look to achieve your financial goals, you may be considering working with a financial advisor or an accountant. Depending on your financial needs and goals, you may need both. So, what is the difference between the two, and when do you need to enlist the help of each?
Let’s discuss.
Financial Advisor vs. Accountant
Let’s identify the differences between a financial advisor and an accountant.
Accountant
An accountant plays a role in recording, summarizing, analyzing, and creating reports of financial transactions. These professionals are licensed to provide tax advice and counsel you on preparing tax returns and estate tax returns.
Moreover, accountants play a large role in suggesting tax-saving strategies. While accountants help strategize and suggest these strategies, you likely need a financial advisor to help implement these strategies.
Financial Advisor
On the other hand, financial advisors are licensed to give investment advice and develop a plan to grow your wealth. Their role as financial advisors is to construct an effective portfolio for your financial goals and risk profile. This typically includes:
Retirement planning
Estate planning
Philanthropic strategy implementation
Which Financial Professional Do You Need For Your Goals?
Your relationship with each professional depends largely on your financial needs and goals. So, when do you need the counsel of either?
Some view their financial advisors as the architects of their wealth management. Financial advisors interact with their clients more frequently to help implement financial plans, monitor their progress, and adjust the sails as necessary.
Alternatively, an accountant steps into this process as a specialist. Their relationship with clients is traditionally more transactional. These professionals help prepare your financial statements and tax returns when needed. Accountants know and understand the IRS rules and regulations in greater depth than a financial advisor.
Clients typically use an accountant when they have a more complex tax situation; whether that means a business owner, a large family, a rental property owner, or someone with multiple streams of income. Taxes can become complicated, which is when partnering with a CPA can move the needle for you.
Clients use financial advisors when they want to develop a savings and investment plan. Your financial advisor is more involved in your everyday financial planning and decision-making. A financial advisor helps steward you through big life events and helps you plan ahead while working to achieve your specific financial goals.
Financial Advisors and CPAs Complement One Another
Deciding between a financial advisor and a CPA is not a one or the other decision. Financial advisors often work together with CPAs to help you achieve your financial goals. CPAs can offer insight into your financial statements that help guide how your financial advisor helps your plan for your future.
Before you talk with your CPA this tax season, read this article describing a few of this year’s updates to tax deductions.
https://centurawealth.com/wp-content/uploads/2024/08/What-is-the-Relationship-Between-an-Accountant-and-a-Financial-Advisor.jpg14142121centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2022-04-22 16:36:002025-04-08 16:16:38What is the Relationship Between an Accountant and a Financial Advisor?
