Approximately 12 million baby boomers own small businesses in America. With the oldest members of the generation turning 71 this year, retirement concerns are frequently a primary focus amongst the generational group.
Retirement for business owners is different than retirement for employees who work for companies owned by others. For example, boomers who have their retirement savings tied up in their own businesses will need to transition out of their companies in order to access those assets. If that business can’t be easily sold, or the business owner hasn’t explored options for extracting their net worth from their business, it can significantly delay retirement.
The earlier a business succession plan is explored and established, the better your odds for selling at the best price … and enjoying the retirement you deserve. Following are a few tips for business owners to get started.
Organize your books
In order to negotiate the best price for your business, you need to show good documentation for its value. The best way to do this is to update your books. If you end up in a buy/sell agreement with a competitor or as part of a private equity purchase, you can safely assume the other party will be conducting his or her own assessment of your company. You’ll want to have your company’s assets, monthly earned revenue and expenses, tax reports, employment costs and all other data that affects your bottom line included in these reports.
Identify potential buyers
If you have children or employees with an interest in the business, your job may be relatively easy. If you need to search for a buyer outside of your organization, you may have your work cut out for you. The first thing to do is make it known that your business is for sale. Share the information with your chamber of commerce, trade or industry newsletters and by word of mouth – even with your competition. Be sure to also consider the value of closing your business instead of selling. Determining the value of your business assets will help you decide if you can satisfactorily retire on the amounts calculated.
Determine your retirement income
Because small business owners often have much of their retirement savings tied into their company, it’s important to line up retirement planning side by side with business succession planning.
One strategy to consider is selling shares of your company to heirs or successors, providing you with liquidity and giving your successor(s) more authority in running the business over time as you prepare for your retirement. Certain sales to trusts created for your heirs are not subject to income tax if structured properly.
If you have business partners who are interested in continuing business operations after your retirement, then Buy-Sell Agreements are another good purchase option. These give your partners the right to purchase your shares of the business upon settled terms and conditions, while allowing them to continue business operations.
An outright sale makes sense if you don’t have partners or an heir interested in taking over the reins. Either your ownership in the company itself, or the company’s underlying assets can be sold. Through an asset sale, all the business equipment, buildings and customer information is purchased by the buyer. Either option provides the seller with liquid assets for retirement.
It’s a good idea to start business succession planning early and to develop your exit strategy at least three years before you plan to retire. During the process, you should meet with your financial advisors, tax advisors, and legal team to work out all the details to ensure that the transaction meets your retirement needs. Knowing the next steps to take in order to fully enjoy your retirement years is the first step on your road to retirement.
Daniel G. Wani is the managing director of The Private Client Reserve of U.S. Bank for Nevada and Arizona.