Business Owners: Navigating The Exit Strategy
Business Owners: Navigating The Exit Strategy
Building a business is like being a parent. It starts as an infant venture that demands constant attention, often disrupts your sleep, consumes a significant portion of your savings, and puts your hobbies on hold. You nurture it through different stages of development, including some rough times, and guide it to become independent. Eventually, you may depend on it to carry on your legacy and support you financially. The aim of succession planning is to shift from taking care of your business to having the business take care of you during retirement. A well-designed plan ensures a smooth company transfer to the next generation while providing you with retirement income or a nest egg for your future. Here's a review of the retirement options small business owners should consider.
Succession Planning
A proper succession plan is crucial for the future of a business, especially if the owner wants it to continue beyond their own career or lifetime. It also matters if the owner intends to sell the business to monetize their investment. The first step in creating a succession plan is to determine the long-term goals for the business. Will it be passed down to future generations or current employees? If the plan is to sell, how should the sale be structured? Can the buyer make a cash payment, or will financing be necessary? Will the proceeds fund the owner's retirement or serve as a financial inheritance for their heirs? Alternatively, will the business simply close its doors once the owner retires? In some cases, small businesses are so closely tied to the owner's skills and interests that their retirement marks the end of the business.
Internal Succession
Begin planning once you clearly understand your goals. If you are considering an internal succession plan, start at least ten years before your expected retirement. If you have less than ten years until retirement, there is no need to panic; just begin the planning process promptly. The main obstacles to internal succession include identifying a suitable successor and developing their skills to run the business effectively. It is common to go through multiple potential successors before finding the right one. If the plan is to keep the business within the family, ensuring that the chosen successor is genuinely passionate about the role is critical. Grooming a family member whose heart is not in the company can lead to difficulties for both the business and the family.
Selling The Business
If you plan to sell the business, starting five years before retirement is probably sufficient. You'll need to organize your financial records and ensure adequate staffing. Allow enough time to list your business for sale and manage the transition period.
One option is to initially sell a portion, such as 10% or 20%, of shares to the potential successor. Gradually sell more shares until the new owner holds the majority. Retaining some ownership can provide you with income to help fund your retirement.
Closing The Business
In the event that the business ends upon retirement and is not a marketable asset, a cessation plan is necessary. This plan involves collecting outstanding payments, settling debts, and notifying employees, government entities, and creditors. Additionally, you may have inventory and assets that must be sold. While the process of closing a business is relatively simple, it is vital to allocate a portion of the business' income towards ensuring a secure future.
Retirement Planning
Being your own boss means providing for your own retirement. It also means that there isn't an employer looking over your shoulder who will sign you up for a plan. You have to be proactive in setting your retirement money aside. Despite the best business plan, don't assume that selling your business is your only retirement plan.
Having a variable income, which is often the case for people who own a business, makes it harder to save for retirement. Small business owners (less than 500 employees) have several retirement account options to consider, including:
- Solo 401(k): Self-employed individual with no employees (other than a spouse)
- Safe Harbor 401(k): Any employer
- 401(k): Any employer
- Profit Sharing Plan: Any employer
- SEP IRA: Any employer
- Savings Incentive Match PLan for Employees (SIMPLE) IRA: Employers with 100 or fewer employees who earn at least $5,000 in a year (and no other retirement plan — unless for collective bargaining employees
For more than two decades, the financial advisors at the Hurlow Wealth Management Group have helped small business owners choose the right retirement plans and navigate the successful transition out of their businesses. Whether you are a solopreneur or have hundreds of employees, a customized approach to succession planning can help you find the best way to exit your enterprise. Schedule a free consultation today to get on the path to a successful retirement transition.
