A 60-year-old contractor who’s built up a $10 million business must be all set for a comfortable retirement, right? Not necessarily.

In working with business owners approaching retirement or looking to transition to a new chapter, it is apparent that owners often do not put enough thought into balancing their personal financial needs with their goals for handing over control of the company.

This can have some very painful consequences as the owner, late to the game, has to accept cuts to their retirement lifestyle or compromise on their goals of passing the company on to their children or preferred management team.

Too often, succession planning is thought of exclusively in terms of building wealth in the business. The owner’s personal wealth is usually treated separately, handled by a personal financial adviser who’s not talking to those advising on the business sustainability or succession plan.

This is like a patient’s heart doctor not talking to his general physician. In reality, the two spheres are inextricably linked and need to be treated in a holistic way to avoid bad financial and emotional outcomes.

The crucial foundation for a successful business succession plan is to have one’s personal financial house in order. Business owners need to understand their personal balance sheet, their personal retirement goals and what their post-retirement financial independence number is for getting where they need to be. Without knowing this, it’s impossible to understand what options are available to them in transitioning the business.

Many times, an owner’s personal wealth is heavily tied up in the business. It’s not unusual for them to have 90% of their net wealth in the company and to be funding their lifestyle entirely out of the business. Other than that, they may have a relatively small retirement savings account and a few other assets that are nowhere near enough to fund the lifestyle they expect.

This kind of situation equals trouble, especially if the succession date is only a year or two away. The owner could sell to a third party and walk away tomorrow with $10 million, but that may clash with their long-held desire to leave a legacy by passing on the business to their children or key management team members.

The latter option may require the owner to provide financing for their successors, but that could create big risks for a retirement plan and even make it unsustainable. This is something that requires difficult conversations and decisions that weigh important financial independence needs on the balance-sheet side against issues that are much more nebulous and emotional on the succession side.

For example, is a son or daughter really capable of running the company after the owner leaves? Maybe they have the potential, but are they getting the right training and experience to be successful? Do they even really want to do it?

These kinds of questions become a lot more difficult if the owner doesn’t have a personal financial plan in place. If that hasn’t been taken care of for their retirement and they are not willing to sell or wind-down the business, the owner could effectively be putting their retirement in the hands of family or a management team. Are they ready for that responsibility and is the owner comfortable with this risk?

There are two key components of a solid personal plan for succession.

1. Shore up the owner’s personal wealth so there are more options when it comes to the business side. What do they need to get out of the business to achieve the lifestyle they want? Usually, this means putting in place a strategy to divest risk assets (i.e., the business) and create a more conservative, liquid asset profile.
2. Build a crisis plan. The goal may be a certain transition plan, but what happens if the unexpected strikes and the owner is not around anymore? Does he or she have an advisory board in place to handle things? Will a spouse or children take over running the business, or should they sell it?

There’s a third ingredient to this that’s no less important: time. A holistic transition plan isn’t something that can be thrown together and implemented in a year or two, especially if it involves passing the business on to family or management. A decade is a better yardstick.

It takes time to structure withdrawals from the business in a way that doesn’t hurt the company, and to train and educate the next generation. Owners tend to be very good at spending time in their business but often don’t put enough time and effort working on the business.

With enough time, the process can be energizing and fun. With too little, it can become very stressful, both for the pocket book and for the heart.