Most business owners are so focused on the daily operations of their business, they don’t plan their transition to retirement. Owners might think that they can sell the business and fund their retirement, end of story. That can happen, but things seldom go as envisioned. First of all, most businesses don’t sell. On the popular business-for-sale websites, about 20% of the businesses sell. 80% DON’T sell. (VR Business Brokers success rate is higher, but still less than half). That would be a catastrophic event for your retirement.
By the way, those businesses that do sell may not sell for what you expect. There are several ways to value your business; one common method is “fair market value”, which is preferred by most CPAs. This is an academic method favored by the courts that differs business from the business broker methodology that is more focused on actually selling the business, a method called the “most probable selling price”. You do need to get your business valued to do your financial planning, make sure you get a realistic valuation from people who are focused on selling businesses.
The benefits of planning can help mitigate the above dilemma, and potentially save your retirement. You need to start thinking offense and defense when it comes to your retirement planning. Unlike an employee with a pension and a 401(k), a business owner is responsible for creating their own retirement income. Your offense is your business- and building it up and selling it for the most possible at the best possible terms. Your defense is an alternative to your business- creating a retirement income independent of your business. The natural impulse is to put a big chunk of your profits back into the business so it will grow. The returns you get in your business can’t be matched with investments available, so it seems to make sense to put your money where it generates the most return. Please think again. It may feel like you’re sub optimizing, but you need to sock some money away for retirement. You need to plan for your retirement for your business and for yourself.
How soon do you need to start this process? Ideally three years before you want to sell your business you would start preparing your business for sale. Tidy up the books, discontinue unprofitable product lines, move aggressively on costs, develop a management team that makes you replaceable. You need to start your defensive financial planning now. Create a personal financial plan that will provide retirement income a few years down the road. This commonly can’t be done in three years, so the more time the better, but it’s never too late to start, so start now.
How do you get started? You build a team. You should create an offensive team to build the business up to sell, and a defensive team to build a more traditional financial resource for your retirement. On the offensive team you might want a consultant to help you prepare the business for sale. A business broker to value and assess the salability of your business. On the defensive side a financial planner to get your personal financial plan identified and funded. Defense should also include life insurance and disability insurance to cover life’s unpleasant surprises. Your accountant and attorney should be notified of your plans, and they might have some input to the process also. Depending on the skills of the parties involved, you might have captains of each team coordinating the efforts of each. This will cost some money. It can be money well spent.
How is this retirement effort funded? It is time to start taking some money from offense- your business and putting it into defense- your personal financial resources. A financial plan, insurance, and retirement nest egg need to start drawing more resources away from the business. The income from the business is variable, and it might take some discipline to continue to fund the defensive personal financial resources, but it is important. It also creates a buffer that will help if one of life’s unpleasant surprises comes before you’re ready to retire, and before your business is ready to sell. It takes some discipline to think about your business and your personal finances separately, but from a financial perspective, make sure your business is working for you, not the other way around.
Execution is key. If you don’t have a team in mind, get busy identifying them. Check with your existing advisors, and with other business owners for references. You want to get experienced advisors who understand what you’re trying to get done, and can help you get there. Don’t procrastinate another year, get going now. You’ll thank me for creating your retirement.