First off, let me say this: good job.
You asked the question when so many other small business owners just assume the answer, or put off planning until it's too late, defaulting to selling their business down the line.
Manta, an online resource aimed at helping small businesses, surveyed nearly 2,000 small business owners in 2017 about their retirement. They found that over a third had no savings earmarked to fund their retirement.
I don’t make enough profit to save for retirement – 37%
I used my previous retirement savings to invest into my business – 21%
I plan to sell my business to fund my retirement – 18%
I don’t see the need to save for retirement – 12%
I don’t have any plans to retire – 12%
Now, the problem is not necessarily the plan. The problem is stopping at, 'I'll sell the business' isn't a retirement plan – it's a retirement idea. So when the time comes to retire, the business owners will come across hurdles they never planned for – and that could end up pushing their retirement further and further down the road.
But you're here, asking the question, and that's half the battle right there.
So, let's get to the answer.
No Simple Answers
If you're looking for a simple answer to whether selling your business should be your retirement plan, the answer is:
In most cases no, or at least not on its own. It can, however, be an integral part of a robust retirement plan.
Your retirement plan, should it include selling your business, should take into account the big picture so you can minimize risk while maximizing the possibility of growing your business and successfully transitioning into retirement when you choose to.
There's Always Money in the Banana Stand
If you're like most small business owners out there, you've put years of your life into creating, sustaining and growing your business. That time and effort is worth something. In fact, a successful business may very likely be the single best investment you ever make. However, depending on the equity you’ve built into your business, selling to fund your retirement comes with its own share of strengths and its own set of hurdles. If you haven't explored these possibilities, and made plans to protect yourself, then you have only a retirement idea.
Strengths of selling your business as a part of your retirement plan
Building your business requires capital – whether that's your time and energy or the reinvestment of profits from your business. Saving for retirement takes some of those funds that could go back into your business, helping it to grow, and ropes them off for the future. That's great for future you. But, if you successfully grow your business that’s good for current you, and future you. Reinvesting in your business, when done intelligently, can reap huge benefits for you and your business.
Weaknesses of selling your business as a part of your retirement plan
Relying solely on selling your business to fund your retirement is not as reliable a strategy as saving and investing. Businesses fail, whether that's due to disability, death, divorce, departure, disagreement or the market simply moving on. Removing some of that risk by investing in high quality assets outside of your own business is a prudent move.
Even if your business is still around (and still doing well) when you want to retire, you still have to find a qualified buyer and deal with the sales process, which can be complex, take a lot of time, and may end up with you getting less than you expected. This may require you change your plan, or lengthen timelines if you can’t sell when you want, or for the amount you want.
A Comprehensive Plan to Sell
With those things in mind, there's no reason you shouldn't be able to utilize the equity in your business to help fund your retirement. If you plan to go that route, here are two more things to consider as you put together a comprehensive retirement plan as a small business owner:
a proper transition/succession plan
a holistic approach
Create a Proper Transition/Succession Plan
According to the same Manta study, approximately one-third of small business owners don't have a transition/succession plan. If you plan to use the equity in your business to help fund your retirement, this lack of a proper plan will cause problems.
No one wants to buy a business where the current owner is an irreplaceable and integral part – especially if that owner intends to retire. Then, what the buyer gets is not a fully functioning business, but one that has become hollow with your departure. And that's not worth very much.
Creating a proper succession plan allows you to fade out of your business without taking a large portion of its value with you, making it crucial to have a good transition/succession plan embedded into your retirement plan.
Keep Your Eggs in Separate Baskets
No matter how good your succession plan is, the success of your business, and its valuation, is never guaranteed. The value of your business today, will not be the same as the value of your business ten or twenty years down the road. And though we all look forward to our businesses growing, not every business gets to the point where there's enough equity in it to fund years of retirement.
That's why we encourage small business owners not to just leave all their eggs in their business, but rather take a holistic approach to their retirement planning. Just as you wouldn't put every bit of your retirement savings into a single stock, you shouldn't put all your trust in the sale of your business in order to fund your retirement. So, even though you plan to sell your business to help fund your retirement, you should still have some separate and distinct retirement assets to form an integral part of your retirement plan.
With the proper planning, selling your business can be a part of your successful retirement plan, freeing up your capital to be put back to work in your business, and helping it to grow. We can help you create a holistic plan that takes into account both your business’s requirement for capital to grow, and your need to have a rock solid retirement plan. Whether you want to pursue fully tax-deductible ways to use excess corporate cash to fund retirement or by sticking to more traditional retirement strategies using personal cash or some combination of both – we’ll help you create the perfect retirement plan. For more info on this, give Bayview Financial a call today!