Company Exit Can Impact Business Owner’s Personal Retirement Planning

Every business owner needs to establish an exit plan. Not just to decide the fate of their company or identify successors but to effectively plan for their personal retirement income. Your chosen exit channel can significantly impact your post-retirement finances. Here are some steps you can take now to prepare for your company exit and retirement:

Don’t assume. Many business owners assume the sale of their business will fully support their retirement needs and goals, but that can be a financially devastating miscalculation. Some businesses cannot be sold (their product or service has become obsolete, the market has become polarized, they are too specialized, they do not generate enough income), while others end up selling for far less than the business owner expected. Personal retirement planning should not rely solely on sale proceeds.

Define exit objectives. The first step in determining an exit plan is to identify your needs and goals for retirement. If it is more important to see your children or key managers carry on the business than to maximize sale profits, then that will necessitate an internal succession plan. If you want to seed a new business venture or spend your retirement years traveling the world, you may prefer to sell for the maximum possible sale price to a third party. Once your objectives are defined, you can begin to implement retirement income plans.

Know the value of your company. If your exit plan entails either selling or transitioning your business to help fund your retirement plan, it is important to start tracking your business’ value as soon as possible. Do not wait until a year or two before your planned exit. If you don’t have an accurate sense of its value it will make it difficult, if not impossible, to gauge any shortfall. To determine value, conduct a net proceeds analysis that includes taxes, debts, earn out, escrow, owner financing, and any other pertinent factors that will help clarify what your take-home income will be and when you will have access to it.

Do not take unnecessary risks. The stock market and other risky investing can be a lot like horse racing—betting future money on picking a winner today. You win every now and then, but overall the gains do not compensate for the losses. Don’t bet your future on risky investments. Instead, many studies suggest that investing conservatively—building a diversified portfolio of safer investments—will reap significantly better returns on investment over the long term. Besides if you are like most business owners, you may already have an over-concentration of wealth in your existing business, which can be very risky.

Avoid rose-colored glasses. When a business is healthy and running smoothly, it can make sense for a business owner to temporarily defer salary or delay contributing to personal savings in favor of investing in the business, so it can become even more profitable. It can also make sense to forego a salary to help a company get through a rough patch. But failing to put money in your savings to float your company can be a dangerous financial band-aid that obscures the real problems. A business owner needs to be objective to identify how best to fix their company’s problems to keep it sustainable and profitable.

Become the landlord. Retirement investment can be more than stocks, mutual funds, IRAs, and annuities. A popular strategy for many business owners is to buy the building where their company is located. After exiting the company, the rental income—whether from their own company or a new company that moves in—can provide a steady stream of retirement income.

We help business owners determine what exit strategy best fits their retirement needs then work with them to create an effective, thorough exit plan to implement that strategy.

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