3 Things Business Owners Must Consider Before Retirement
As the average person nears retirement, mixed feelings of excitement, unknowingness and even fear are common. You may be asking yourself, “how am I going to spend all my free time?” or “will I have enough money to support myself and my family in the upcoming years?” For a business owner, there’s even more to consider. “Will I have any involvement in my business after I retire?” “Who will my successor be?”
Some of these thoughts may seem so daunting that they keep you awake at night. The good thing is that thinking about them in advance will ensure you’re prepared when the time to retire does come. Here are three things to consider:
According to a BMO Wealth Management survey of small business owners, 75% said they had less than $100,000 saved for retirement. This is a staggering statistic considering a retired person planning to withdraw $50,000 per year needs to have $1.1M saved to sustain themselves until age 90.
Many business owners make the mistake of banking on the money they will get from selling their business to fund their retirement in its entirety. Putting all your eggs in one basket is always a risky strategy. Think of your retirement fund like a stock portfolio: it needs diversification.
The money you receive from selling your business or your share of the business can certainly contribute to your retirement savings plan, but you should also consider other avenues like a Solo 401(k) or a Simple IRA. Find a financial planner you trust and ask their opinion. Even starting with small investments will build for the future.
If you plan to fund most of your retirement with the money you receive from selling your business, then it’s imperative you know what it’s worth. Take inventory of all your assets and liabilities. Do some research on companies with similar industries and profits to see how much they have sold for.
You also need to take into account the current state of the market and consider where it will be in a few years. Keeping tabs on macroeconomic events, new laws and regulations and any emerging threats to your industry can help you adapt to stock market fluctuations.
If you want a more precise valuation today, many M&A firms (like ours) offer a range of options that are cost effective.
Your succession plan should cover two main components: ownership succession and management succession. Do you plan to sell your business in its entirety to a third party or do you plan to have a current partner or family member take over? When selling to a third party, ownership succession and management succession are transferred together. When someone like a family member or business partner is taking over, you may choose to transfer the management and control of your business to the successor while still maintaining ownership.
In either scenario, one of the most important things you can do when planning for retirement is to make sure your business can run smoothly without you. If you’re still involved in the nitty-gritty, day-to-day details, it’s time to take a step back. Slowly transitioning yourself out of the picture over a few-year period will be much more successful than trying to do it all in a few months or weeks. Unfortunately, many owners struggle with pulling themselves away slowly, so be sure to have a specific plan (something we can help you with!)
The Bottom Line
For a business owner, preparing for retirement requires a lot more than stowing money away in a 401(k). Considering how you’re going to fund your retirement, what your business valuation is and what your succession plan are all critical aspects of your exit plan.