When you ask small business owners about the future of their businesses, chances are, they’ll have an answer. Revenue forecasts, employee development, plans for expansion — issues such as these are always top of mind.
Yet, ask them about their own future and their individual retirement plan, you’re likely to get an amorphous answer or more likely many confused looks.
Retirement? Not for me. Who would run my business?
I’ll confess, at times I’m no better. As a business owner myself, I realize running and building your business is all-consuming. It makes retirement seem distant, almost nonexistent. Yet, as a financial planner, I also know retirement is very much a reality, and it takes a lot of planning.
With May being Small Business Owner month, I encourage all business owners to take a step back from their business plans and begin to consider their retirement plans.
For starters, let’s all admit to ourselves that we’re not going to work forever. We built our business, but eventually, ownership will change hands or we will simply walk away. Even for the most driven, there’s a time to move on to our next adventure. Deciding when you want to retire is just as important as figuring out how.
Next, let’s talk about trust. For everyone, saving for retirement involves a certain level of trust. We need to trust in the assets we’ve built over the years, whether our 401(k)s, our business or other investment vehicles. We also hope the market doesn’t nosedive at the wrong time.
For business owners, there’s a higher level of trust that’s required.
For us, we view income as “active.” The hard work we put into building our business results in higher revenue and greater profit. Even kids running lemonade stands understand the relationship between hard work and monetary gain.
Yet, in retirement planning, business owners need to rely heavily on “passive” income (e.g., annuities, investment returns, pension plans and Social Security). It’s not always an easy mindset shift to make and can be an early stumbling block in planning.
Another trust issue is entrusting someone else with our business. Planning for retirement means imagining a day when you’re no longer managing your business. Who will take over? Answering that question has a big impact on your retirement savings.
Selling your business to fund your retirement comes with its own pitfalls. Often the person you trust most might not be the best business owner. Especially if you choose to receive a cash installment, rather than a lump sum up front, if the next owner doesn’t properly manage the business, your retirement livelihood might be at stake. As your retirement date nears, determining how, when and to whom you sell your business is a major decision.
Given the importance of this choice, you’ll want to bring in a financial planner five to 10 years beforehand to begin the process of selling. In addition to a financial planner, consider assembling a broader team of experts. Reach out to an appraiser to get a sense of your business’ value before entertaining any offers.
In addition, it’s wise to bring an attorney and CPA to the table. Lastly, about two to three years before a potential sale, consult a mergers and acquisitions specialist. An M&A specialist can help you clean up your business’ books to make your company as attractive as possible to a prospective buyer. He or she can also provide market forecasts and help determine when the ideal time to sell your business.
Each expert’s advice is unique and invaluable, and their collective insight can have big impact on your ability to retire comfortably.
Clearly, the process of preparing for retirement is a long-term one. It’s not something you can accomplish in a single month. Yet, addressing these issues is essential to the planning process.
Ben Harvey is a wealth management advisor at Northwestern Mutual in Colorado Springs. Contact him at 351-2158.