How to Retire as a Business Owner
As a small business owner, you call the shots on everything in your business. Retirement is no different. Preparing for the day when you can kick back and relax takes the same planning and strategizing you do to run your business day-to-day. The good news is the business you've worked long and hard to build may be a tremendous asset you can tap into to help fund a retirement that meets your goals.
Even when it seems like only yesterday when you were writing your business plan, it’s probably not too early to begin planning for your retirement. You’ll want to have enough money to support the lifestyle you want, and you’ll need a plan for your business, whether it’s to keep it going, sell it, or dissolve it.
Preparing to Retire as a Small Business Owner
When you are a small business owner, preparing to retire is a two-fold process that includes financial planning for your personal needs and the future of your business.
Set an Exit Strategy
If you don’t already have an exit strategy, creating one will assist in planning for what happens to your business when you retire. You’ll want to decide whether to:
- Sell the business to a third party
- Sell or transfer the business to family members
- Sell the business to key employees or your management team
- Retain ownership of the business with a management team to operate it
- Liquidate the business
Create a Succession Plan
If you expect to transfer or sell the business to family members, you’ll also want to create a written succession plan that details who will run the business and how ownership will be divided.
A written succession plan will help ensure that you’ve left the business in capable hands and avoid in-fighting among family members once you’ve retired.
Making a Retirement Plan for Your Business
More often than not, how you finance your own retirement and what you do with your business are inextricably connected.
You can’t very well ride off into the sunset without a solid plan for what your sunset years will look like and how you’ll bankroll your new lifestyle. Like most entrepreneurs, you depend on your business to provide the path for achieving your financial and personal goals.
To address your personal needs, you’ll want to answer these questions:
- When do you want to retire?
- Do you want to stop working entirely or continue to be involved in your business in some capacity?
- What will your retirement look like? Do you want to travel? Relocate? Spend time with your family?
- How much money will you need to support the lifestyle you want?
Your current expenses can serve as a starting point for your retirement budget, but remember that your lifestyle will likely be different in retirement and those differences might add to or reduce your expenses.
For example, you might want to downsize or relocate to an area with a lower cost of living. You’ll probably want to plan for increased healthcare costs as you age, or you might want to account for doing things like travel or golfing that you didn’t have much time for while you were building and running your business.
Once you’ve decided how to spend your retirement years, you can estimate the amount you’ll need. You can also use an online retirement calculator to estimate your financial needs.
With an exit strategy in place and a clear vision of what you’ll need in retirement, it’s time to start implementing your retirement strategy.
If You Plan to Sell Your Business
Young entrepreneurs and corporate refugees are always on the lookout for retiring business owners looking to sell. If your exit strategy is to sell your business, it’s a good idea to begin planning two to three years out or more. Whether you intend to sell to a third party, key employees, or family members, potential buyers will want a clear picture of how your business performs and operates. You’ll want to:
- Get a business valuation
- Clean up your books
- Explore ways to increase profits
- Organize records and documents, such as licenses and past tax returns
- Document systems and processes
You’ll also want to decide whether you want to leave the business entirely or whether you want to retain all or some of the business and remain involved in some capacity.
You might reduce your hours, maintain a seat on the board of directors, take a role as a consultant, or retain ownership completely and hire a management team to run the day-to-day business.
Business brokers or M&A specialists can provide business valuations and point out issues that should be addressed to increase the value of your business and attract buyers.
Getting a CPA, attorney, and a financial planner or wealth advisor on board can help you devise the best strategy for minimizing taxes and getting optimal returns on your sale.
Is Your Management Team Up to the Task?
In most cases, outside buyers will want to know that you have a strong management team that can keep the business on track through the ownership transition and beyond. Consider hiring a general manager or designating a key employee to fill the role.
A solid management team is key if you intend to retain all or some ownership of the business, but remove yourself from running it. To stay involved, you might maintain a seat on the board of directors, take a role as a consultant, or continue working part-time.
If you plan to sell or hand down your business to family members, you’ll also want to make certain that the family members designated to run the company are prepared for management. They might need additional training or mentorship to ensure they can take the reins when the time comes.
Make a Plan for Financing the Sale
If you intend to sell your business to family members or key employees, you’ll also have to make sure they are financially prepared to acquire the business.
Depending on your retirement needs, you might arrange for an installment sale or a leveraged buyout if family or employees cannot buy the business outright.
In an installment sale, you finance the sale over a specified period of time. The family members or employees use the company’s profits to make installment payments of principal and the agreed-upon interest until the loan is paid. An installment sale provides you, as the owner and seller, with a steady income stream until the loan is paid off.
If the business assets, cash flow, and prospects are solid, family members or employees can also seek outside financing to acquire the company. With a leveraged buyout, you’ll receive the proceeds from the sale in one lump sum.
Another option if you intend to sell your business to employees is to set up an employee stock ownership plan (ESOP), a form of profit sharing that employees can eventually use to buy out your shares in the business.
If You Want to Liquidate Your Assets
If your business has been floundering and you don’t see a clear path for selling it, liquidating your business assets might be your best option.
Liquidation can help you recoup some of the investment you put into your business and help finance your own retirement.
Planning for Your Own Retirement Income
It’s never a good idea to depend entirely on the proceeds from the sale of your business to fund your retirement. For one thing, estimates of the future value of a business often fall short of reality. In addition, markets change, your business might face unexpected challenges, or you might overestimate the value of your company.
By setting up a retirement savings plan, you can make sure that you’ll have enough money to support your retirement goals.
As a small business owner, you can save for retirement by setting up an investment strategy or a retirement savings plan. If you choose to set aside a portion of your income to invest in stocks, bonds, or another financial instrument, you won’t have to abide by the same rules for withdrawals that retirement savings plans require, but you also won’t get the same tax advantages provided by retirement savings plans.
There are a variety of retirement savings plan strategies available to small business owners. It’s a good idea to consult with a financial advisor or tax professional before selecting a plan because each has different contribution limits, distribution rules, and when and how you pay taxes. Consider the pros and cons of the following plans: Simple IRA, SEP IRA, Roth IRA, and a Traditional 401(k) to reach your financing goals in retirement.
To ensure a comfortable retirement, the most important thing a small business owner can do is begin planning early. When establishing an exit plan, you’ll need to develop a strategy for your business as well as identify personal finance needs for retirement. By having a clear understanding of your retirement goals, you can decide whether or not to stay involved after selling your business and ensure a successful outcome.