When I speak to business owners about retirement planning, it’s not unusual for me to hear, “Well, selling my business IS my retirement plan!”
It’s a nice idea on paper. You build up your business to a point where your life’s work can be sold for an amount that finances all of your dreams for years to come.
The problem? Many business owners can’t say with absolute certainty that their company will indeed be able to deliver on completely funding their retirement. No wonder they can often receive a rude awakening by realizing that if they depend mostly on their business to primarily fund their retirement years, they’ll only get so far financially.
How can we help minimize the chance of that “surprise” from happening when you stop working?
1) Prepare For The Sale Well In Advance
Unless someone has a very unique business, they haven’t done nearly enough preparation for the sale. If you’re 60 years old and you’re beginning to think about selling your business five years from now, that could be a big problem. Unfortunately, far too many business owners procrastinate when it comes to exit planning.
That’s why it’s vital to have an exit planning conversation as soon as possible to address questions and concerns such as:
• What are your goals and objectives for selling the company besides potentially contributing to your lifestyle in retirement?
• What do you need to get for the sale of the company?
• What are the “deal killers” for you?
• Do you or your family want to retain any type of ownership or not? Are we talking about succession or a complete exit?
By answering questions like these, we can begin to build a plan for sale that factors in where you are today and where you want to go from here. That includes both your personal and professional goals. It’s just too important to put this conversation off as it means everything to constructing a well-thought plan.
Even as you plan for a sale years down the road, the process of positioning your company to be appealing to a potential buyer should happen right now. How are your current operating procedures? Do you have a solid number of clients on your roster? Is the data quality of your financial information strong or are your financials a mess? Implementing best practices today in terms of your processes, growth, culture development and more can help maximize the value of the business further.
2) Have A Valuation Done On The Business
Do you really know what your business is worth? Have you maximized the value of the company? Most owners haven’t done the necessary work to find out or they might make assumptions.
There are many different types of valuations that can be done on your business ranging from an Income Approach to a Market Approach to an Asset-Based Approach. These vary by industry and scenario. Depending on the approach, you can factor in historical cash flow versus projected cash flow, comparables that show how other companies in your space have been bought and sold as well as estimated assets and liabilities during a liquidation process.
No matter what approach for valuation you take, the bottom line is: After the valuation of the company is done, what are the key drivers you can control to increase the value of the business prior to a sale?
Certain internal drivers are in your control and others may not be – in the case of the latter, you could lose a key customer or the market for your product or service may change dramatically. Can you control circumstances like that? Not as much as you can only aim to plan accordingly for them.
This is why it’s vital to have something else in addition to selling the business in your “back pocket” for accumulating retirement funds – a mechanism that provides a higher probability of certainty.
Supplement What Your Business Is Providing
When we have the elements in place for preparing for the sale well in advance and a valuation done on the business, we now have a crucial framework in place for understanding how much capital has to come from the business. However, I’ve seen examples of profitable businesses that have cash flowing that still don’t fulfill the owner’s wishes of 100% funding their retirement. Don’t risk this happening to you. You want to build other assets in conjunction with the sale of the business.
Where do we begin?
There are a number of qualified plans that enable you to design a tax-deferred structure in which you build funds outside of the company that are protected. In doing so, you’re using what is essentially a tax planning tool to become less dependent on the sale of the company.
Naturally, this is a far more advantageous position to be in. Rather than becoming too dependent on the sale and requiring a large income as a result, a qualified plan built around tax-deferred elements can provide you with greater flexibility and options. You can plan with a greater degree of certainty knowing what you need to put aside to firm up your retirement years without depending solely on the sale of the business.
If you’re 10-15 years away from potentially selling your business, the timing couldn’t be better to evaluate how to put the right pieces in place. But let’s not stop there. Let’s also be sure to discuss the kind of qualified plan to ensure that you’re not putting all the weight of funding your retirement on the shoulders of your business.
As your Chief Retirement Officer at Fiduciary Financial Partners, I can help you chart a course between now and the sale of your business as well as the many years in retirement you plan on enjoying. That’s how you Confidently Embrace Your Financial Future.
Nick Economos, CRPS is a dedicated independent Financial Advisor and Chief Retirement Officer at Fiduciary Financial Partners. He has a wealth of expertise in designing qualified retirement plans and participant education programs.
Fiduciary Financial Partners, LLC is a Registered Investment Adviser. This blog post is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Fiduciary Financial Partners, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Fiduciary Financial Partners, LLC unless a client service agreement is in place.