It’s not your imagination, it really is trickier!
This is the third and final in a series of articles on why as a business owner, retirement planning is different for you than it is for non-business owners. To review, not only do you have to figure out all the same difficult retirement planning questions that everyone else has to figure out, but you also have a couple of really big challenges that are unique to you as a business owner.
In the first article in this series I talked about the things everyone has to deal with in retirement planning. In the second article I talked about some of the unique risks business owners face when it comes to retirement planning.
In this article I will cover what is probably the single biggest issue business owners face with retirement planning that non business owners don’t have to deal with. That’s the question of what to do with the business.
While it’s certainly possible for a business owner to just turn off the lights and walk out the door when they’re ready to retire, the reality is that’s not most owners first choice. Often, having spent years building a successful business means that your business touches many people. That could include suppliers, partners, employees, and customers. To leave all those people in the lurch, just because you don’t want to work anymore is rarely an option business owners want to consider. Usually, it’s exactly the opposite. Most business owners would like to see their business and “legacy” continue after they’re no longer involved. Figuring out how to set your business up to continue after you’re gone is a process commonly referred to as exit planning.
This is where things can start to get difficult. Basically, if you want to keep the business going after you’re gone, you have two options. The first is to transfer ownership to someone outside the business. This is usually a third-party buyer. It could be a competitor, a private equity group, or anyone not currently involved with the business. The other option would be to transfer the business to someone already in the business. This could be family members or your management team. There are pros and cons to both options.
Whether one option is a pro or a con will depend on your financial goals and goals based on your values. Financial goals can be thought of as making sure you get the money you need to pay for the life you want to have after you retire. Basically, your future financial security. Goals based on your values can include things like wanting your current employees to not lose their jobs if a new owner comes in. Another example of a values based goal would be wanting your kids to run the business after you’re gone. Both these examples of values based goals are often at odds with you achieving the greatest financial benefit for your business. That’s where it may be necessary to make some compromises.
If you want to pass the business on to the kids, what kind of financial compensation will you have them pay you for the business? Will it be a gift; meaning you get no compensation? Can you afford that? Will you continue to draw a salary, even after you’re no longer contributing? Having run a business, you know that you can’t afford to compete in the market compensating people that aren’t contributing to the success of the business. Do you want to hang that on your kids? These are just a couple of examples, but you get the idea. Figuring out just the right balance between your financial and values based goals can be difficult.
Bottom line, for business owners planning their retirement, planning for the exit from their business adds an additional layer of complexity that non-business owners don’t have to worry about when preparing for their retirement. Because preparing to retire is so much more complex for business owners, it’s imperative that you get started early. While your retirement planning puzzle is more complex than most, it’s not impossible, and there are people out there who can help!