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Grow Your Business Finances

5 Ways Small Business Owners Can Start Preparing for Retirement

5 Ways Small Business Owners Can Start Preparing for Retirement
Credit: vinnstock/Shutterstock

Entrepreneurs are used to spending lots of time thinking about their businesses – how to grow, protect and even pivot them if necessary. What they don't often think about is themselves, especially their retirement and how to prepare for it.  

In fact, a recent Manta survey of 1,960 small business owners revealed that one-third don't have a retirement plan. "That's a lot of entrepreneurs whose futures are filled with a great deal of uncertainty right now," said John Swanciger, CEO of Manta.

However, there are simple steps business owners can take now to position themselves for a more secure retirement in the future.

In planning for retirement, it is helpful to envision where you want to end up – whether living a modest life in a little bungalow, traveling around the world in your own yacht or somewhere in between.

"Defining retirement goals and lifestyle expectations now may help the business owner start from the target and work backward," said Aaron Milledge, co-founder and financial advisor at Targeted Wealth Solutions.

Once they identify the components needed for a comfortable retirement, business owners can then craft an appropriate plan to sell their business or pass it along to an heir. "This may [also] help with determining the ideal sales price (and managing expectations to that end) or developing a management handoff timeline," Milledge added.

"In the corporate world, there's almost always another employee waiting in the wings to take the place of a co-worker who has retired," said Swanciger. "That's not usually the case for small business owners, who typically have a difficult time relinquishing control to just anyone."

According to the Manta survey, 34 percent of small business owners don't have a succession plan in place. "But it's crucial to your legacy and your company's future that you prepare a solid strategy," said Swanciger.

To get started on a succession plan, Swanciger advises consulting with a trusted lawyer to figure out the next steps. Then, meet with the family member or employee you have in mind to take over the business and ensure they're the best person for the position.

"While these processes – and eventually handing over the reins to your business – may seem daunting, taking the time to plan ahead will alleviate many of your future headaches," said Swanciger.

Business owners are expected to know the ins and outs of their market, but they may not be so savvy when it comes to selecting the best retirement savings plan available to them or considering the tax implications of selling a business. Therefore, it's crucial to build a team of professionals – an attorney, accountant, financial planner, etc. – who will help you navigate uncharted waters.

"A financial advisor – from any financial institution, including your local bank – can help you take the next step with a retirement plan, and a plan provider can walk you through the various plans available and help you identify the most financially viable and ultimately beneficial retirement option for you," said Paul Davidson, director of human resources at Paychex.

Tony D'Amico, CEO and senior wealth advisor at Fidato Wealth, recommends forming a network of support resources to anyone who hopes to sell their business as part of their retirement strategy. "It is very important to work with an accountant ahead of the sale to improve the P&L and financials of the business to maximize the attractiveness and ultimately the sale price of the business," he said.

D'Amico pointed out that a wealth manager can help owners determine the amount of after-tax proceeds needed to sustain the retirement lifestyle they desire. The wealth manager can also work in tandem with the accountant and attorney to ensure that the sale is structured in a way that maximizes the after-tax proceeds.

If your ultimate goal is to fund your retirement from the sale of your business, do all you can to make sure it's in the best shape for potential buyers. Small business owners should start preparing for the sale of their business at least three to five years before they want to retire, according to Kevin Vandenboss, broker with Vandenboss Commercial.

"All too often, business owners come to me when they're at the point of being desperate to sell," said Vandenboss. "They haven't been preparing for the sale of their business, either because they don't know how or because they always thought their kids would take over the business."

To avoid this situation, Vandenboss recommends that business owners get an accurate valuation of their business and consult a tax professional to get an understanding of the tax implications of a future sale.

Vandenboss explained that many entrepreneurs try to minimize taxes by positioning their business to look like it's making as little profit as possible. But since businesses are valued based on their profit, this approach can actually hurt them in the long run.

"It's best to start showing as high of a profit as possible at least two to three years before selling," said Vandenboss. "Look at it this way: Every 25 cents saved in taxes could be $2 to $3 or more lost in business value." 

Once that's done, owners should begin decreasing their role in the business. "Small business owners should work toward a goal of being less involved in the day-to-day activities of their business, because businesses that require the owner to work long hours are less attractive to buyers," said Vandenboss.

One way to curtail an owner's involvement is to employ a stellar staff. "Consistently recruit and retain top talent and treat your employees well with good retirement options and benefits of their own," said Davidson. "Loyal employees and customers are a great selling point when the time comes."

Though selling a business is one way to fund a retirement, many experts warn about the danger of relying solely on the money from a sale to bankroll your golden years.

"What if your company suffers from a sudden downturn in business, severe property damage or any number of possibilities?" Swanciger said. "In these cases, it's unlikely that you could find a buyer – putting your retirement savings and livelihood in jeopardy."

According to Davidson, owners should have a contingency plan in place and begin saving as early as possible in case their business does not sell at the right price or the right time. These retirement plan options can come in the form of SEP IRAs, SIMPLE IRAs, self-employed 401(k)s or a combination of these plan types. 

When determining which savings plan to select, business owners need to consider a host of issues, including how much income they expect to earn, the amount they want to contribute and the complexity of administering any given plan.

It's important to explore your options, because no one plan is perfect for every business owner.

"The best retirement plan for entrepreneurs is specific to each one's individual circumstances, so it's important to research various options and consult with an expert before deciding," said Davidson.

Paula Fernandes

Paula is a New Jersey-based writer with a Bachelor's degree in English and a Master's degree in Education. She spent nearly a decade working in education, primarily as the director of a college's service-learning and community outreach center. Her prior experience includes stints in corporate communications, publishing, and public relations for non-profits. Reach her by email.