78 percent of small-business owners plan to sell their company to fund 60 percent to 100 percent of their retirement, yet very few are aware of its true value. (CNBC and FPA)
Does this sound like you?
As business owners ourselves, we understand how much time and effort goes into building a thriving business. And we understand that for many of our business owner clients, the business itself is expected to fund retirement. Having a clear picture of the value of your business and how you plan to capitalize on that to fund retirement are steps that should be taken well in advance of planning the actual sale or transfer of the business. In addition, it’s important to have a plan to use the business to fund retirement while you are still working by implementing and funding a retirement plan. And most importantly, we suggest putting together a strong team to help with the details.
WHAT YOU NEED TO KNOW IF YOU PLAN TO SELL YOUR BUSINESS TO FUND YOUR RETIREMENT
1. Have an exit plan. Do you plan to sell the business, or transfer it to other employees or family? Despite the huge number of entrepreneurs who plan to fund their retirement by selling their business, according to the U.S. Trust, 72 percent of business owners don’t have an exit plan. And in this case, most plan to either sell the business, or transfer it to their children. You’ll want a business consultant to help here. They can manage the process of preparing the business for sale and marketing it.
2. Know the value of the business. There are several different ways to value your company and knowing well in advance what your value and your proceeds might be are critical. Once you have an idea of the value of your company, determine if this is enough to fund your retirement. Are there other steps you need to take over the next few years to build up the value of the firm before you sell it? Hire a business valuation firm to help here, and work with your financial planner here, too.
3. Know how you will market the business, who potential buyers might be and how to find them.
4. Get your accountant involved. You’ll want to work with an accountant regarding tax strategy around the proceeds of your sale and all tax reporting necessary. Have your books in order so you can provide accurate financial statements to a prospective buyer.
5. Bring in a business attorney to draw up the documents.
6. Coordinate with your financial advisor early on and along the way of the sale. You’ll want to be sure that the proposed sale generates the income you need for retirement, and have a plan in place for the proceeds that provides the lifestyle you want and that is sustainable.
7. Diversify your retirement funding sources by having a retirement plan in place. Did you know nearly half of all small business owners don’t have a retirement plan in place? (according to TD Ameritrade)
While selling your business may be the plan to fund retirement, there is no guarantee your company will generate the proceeds you need it to in order to fund the lifestyle you want in retirement.
Having a retirement plan that you consistently contribute to as you build your business is a good way to diversify your retirement funding sources. In addition, contributions to a company retirement plan will lower your taxable income, which is a huge benefit.
We understand that most business owners want to plow earnings back into the company, but we suggest carving out some cash to contribute to a retirement account. Depending on your financial situation, you might consider a 401k/PSP plan, SIMPLE plan, even a defined benefit plan. Your accountant and financial planner can work with you to determine the best fit for you.
We are huge proponents of entrepreneurs and the risks they take on a daily basis doing what they love. We want nothing more than for this hard work to translate into a great reward for every business owner. Following these steps and putting thought into the sale or transfer of your business well in advance can give you the best possible outcome.
If you’d like to learn more about how we at WealthChoice help professional women leverage their business to live life on their terms, please let us know.
