by
Badgley Phelps
| May 18, 2017
By Jeff Walters
According to BizBuySell, an online marketplace, 6 in 10 small business owners in the U.S. plan to sell their businesses over the next decade. Many of these owners are baby boomers looking toward retirement. But retiring as a small business owner isn’t the same as retiring as a traditional employee working for a large firm with a 401(k) plan. Successful small business owners have a unique set of opportunities and challenges when it comes to retirement planning.
Here are steps we encourage small business owner clients to consider a few years before the sale:
Develop a financial plan
In a financial plan, you can articulate your goals of what a successful retirement looks like for you. How much will your lifestyle cost? Where will you live? Who do you want to spend time with? What hobbies, charitable endeavors or even work do you want to pursue? It’s important to take both the financial and non-financial factors into account. It’s a big change to go from working in your business every day to suddenly giving up control to someone else. I’ve noticed that clients who think these things through in advance are, on average, more satisfied in retirement than those who only focus on the financial aspects of the sale of their business.
Align your business goals with your personal goals
Once you know what your ideal retirement looks like, you can begin to align the goals of your business and its ultimate sale with that in mind. Are you hoping to transition the business to your son or daughter? Or to a key employee? What will that look like financially and how may that affect your retirement vs. a sale on the open market?
This is the point where you should consider engaging a consultant or business broker who specializes in your industry. The price that a business will sell for varies wildly across industry, structure and size of the business. A good, competent consultant can help you make a realistic assessment of the value of your business for an internal or external sale.
Max out any available retirement plans
Now is a good time to make sure you are deferring as much income as possible into your company retirement plans. As a business owner, you have a broad selection of tax-deferred investment vehicles such as SEP IRAs, Simple IRAs and 401(k)s. Which one makes the most sense for you will depend on how much you can set aside, how many employees you have and the structure of your firm. Your financial planner can help you decide what makes the most sense. If you have been counting on just the business value to fund your retirement or haven’t set up a retirement plan, now is a great time to get started.
Determine the tax impact of selling
Once you are ready to sell, consider sitting down with a CPA to discuss the tax implications of different ways the sale can be structured. Depending on how the sale is set up, you may pay ordinary income tax, a lower capital gains tax or a combination of the two. This will likely be a negotiating point when you get to the sale itself, since a tax benefit for you is oftentimes a tax cost for the other party. The more educated you are going into the sale negotiation, the better the outcome.
Make sure your post-sale insurance needs are covered
One aspect of the sale that sometimes gets overlooked is insurance. While you owned the business, you may have had a health care plan in place through the company that may go away after the sale. Depending on your age, now is the time to consider Medicare supplement options, the individual health care market or the ACA exchanges. Also, you may have insurance you’ll no longer need, such as an extra liability policy related to the business, or an individual disability policy tied to your income from the business. If you are selling to a family member, you might want to consider a life insurance policy for the benefit of other heirs that won’t be taking over the business.
Consider your legacy
Prior to the sale is also a good time to think about estate planning. You may be facing a windfall from selling your business so now is a good time to update your will. If you’re doing an internal sale to a family member, you may want to think about the legacy you want to leave to other family members as well. Finally, this is a good time to think about charitable endeavors; a gift made the year of the sale could be coordinated to reduce your tax liability.
With good planning, a sound retirement is within reach for the small business owner. Developing a financial plan that aligns your personal and business goals will be critical. It will help you carefully consider the unique opportunities and challenges of the small business owner as you plan your exit strategy. It is possible to successfully retire your small business so you can do the same.
