Retirement Strategies for Small Business Owners

The landscape of retirement planning for small business owners presents a complex picture. Compared to employees who may have access to 401(k) plans or pension benefits, entrepreneurs are tasked with funding their own retirement. And, unfortunately, saving for it can be challenging due to a fluctuating income or insufficient profits; many even end up having to use what funds they do save to invest in their businesses.

According to the US Chamber of Commerce, entrepreneurs often put off creating a business exit strategy until they are close to retirement age. In fact, a recent survey revealed that approximately 25 percent of small business owners lack a retirement plan altogether. Fortunately, there are several simple steps you can implement now that may help you secure the golden years ahead.

Build a support network

One of the most crucial components of achieving a successful retirement strategy is creating a solid support network of professionals, which may include a certified public accountant, a financial advisor, and a business or tax attorney. Their collective knowledge can guide you through the various complexities to better ensure you have the right plan in place and that nothing has been overlooked.

Establish your retirement timeline

Consider where you see yourself in five, ten, or even fifteen years, factoring in both your personal and professional goals. Do you aim to sell your business when you retire, stay involved during the transition to new leadership, or hand it over completely? Do you want to stay where you are or sell your home and move closer to family? Your retirement vision will significantly shape the decisions you make today, so by clarifying your long-term aspirations, you can customize your approach for a more fulfilling future.

Set up a retirement plan

There isn’t a universal solution when it comes to retirement planning, especially as an entrepreneur. You’ll need to select a plan that caters to your business type and aligns with your time frame, lifestyle, and overall risk tolerance. For example, if you own a business with employees and want to save aggressively, a safe harbor 401(k) may be the way to go, while if you’re a sole proprietor looking for something simple, a traditional IRA might be ideal.

Each option offers various flexibility regarding aspects such as the yearly contribution amount and allowable withdrawals, which can make deciding on the best one for you difficult. This is where working with a financial professional comes in handy. They can assist you in researching and identifying plans that work with your health and life insurance policies, employee retirement plans, and practical strategies for diversifying your investments.

Create an exit plan

A detailed exit strategy can serve as a road map for driving your business to accomplish its long-term objectives and facilitating a smooth transfer of ownership. Whether you choose to pass your business on to a family member or sell it to an employee or outside buyer, you’ll need to anticipate the timing of this transition and resolve whether you want to remain in the business for a period once the baton has been passed or step away immediately. Begin formulating your exit strategy at least a few years before you want to retire, and put your focus on enhancing your business’s profitability as much as you can in the meantime.

Keep precise financial records

If you want to sell your business when you retire, having well-maintained records is essential. Potential buyers will likely want to see your most recent financials (from the past three to five years) to assess the viability of your business, so you’ll need to track and manage your data consistently. This means recording all sales and expenses and reconciling your bank and credit card statements monthly to catch and correct any errors or omissions. Meticulous recordkeeping can also help you determine an accurate valuation of your business when it’s time to sell.

Assess your business’s worth

Calculating the exact value of your business for retirement planning can be complex due to the many variables that can affect its worth at the time you’re ready to transition. If your goal is to help finance your retirement through the sale of your business, seek advice from a business valuation expert, who will assess your current sales and assets along with market trends to forecast its potential value several years down the line. With this guidance, you can avoid overestimating or underestimating how much you may be able to get from the sale. However, keep in mind that this estimate is subject to change, so you should never count solely on selling your business to support you during your retirement years and always have other contingencies in place.

Plan for external influences

In an economic downturn, your business’s value may be affected, potentially jeopardizing the funds you may be relying on for your retirement. Find ways to put a positive spin on the situation, such as by using it as an opportunity to demonstrate to potential buyers how your business has weathered similar economic fluctuations over the years. You could also explore options like a partial or leveraged buyout or an earn-out arrangement—in which a portion of the purchase price is paid up front based on your business’s performance and valuation—opening the door to additional payouts when both you and the buyer achieve mutual financial objectives.

Retirement is a deeply personal decision that hinges on a variety of important factors. By planning ahead and considering each one, you can create an approach that may allow you to sail smoothly into your golden years.

TAKE ACTION:
Define your retirement goals, and develop a clear succession plan to protect your assets and future financial security.