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Retirement Planning for Business Owners: Building a Sustainable Financial Future

Retirement Planning for Business Owners: Building a Sustainable Financial Future

April 09, 2024

Imagine waking up, and your morning is free. There's no rush to get out the door, no voicemails, emails, texts, or other worries awaiting you on your devices. For many business owners, it isn't easy to imagine a day when your business isn't your priority—whether you love it or not. For many business owners, depending on your current revenue, valuation, or stage of life, you may be wondering how to transition away from running your business and how to ensure your business is a retirement asset. We've come alongside many business owners to help create a plan that can help make that slow, peaceful morning a reality.

Your Business as a Retirement Asset

As you approach retirement, it becomes essential to cultivate a business environment that thrives independently of your active involvement. Reinforcing the business's operational framework to withstand your absence enhances its appeal to buyers and successors. In consulting with financial advisors, you should be able to develop a retirement plan that dovetails with your exit strategy—ideally, one with favorable terms of participation and accrual benefits.

Valuing a business realistically is vital for retirement planning. An overinflated estimate can sabotage financial projections, impacting your lifestyle in retirement. 

When you're ready to plan and draft your business exit strategy, you'll need financial and practical data on the following:

  1. Business Valuation: Assessing the worth of your business assets and overall entity.
  2. Succession Planning: Deciding if and to whom you will pass on the business.
  3. Sale Considerations: If selling, strategize for maximum profitability and smooth transition.


Selling Your Business Isn't a Retirement Plan

We always recommend that business owners have options outside of selling their business or book for financing their retirement. Because the value of your business is susceptible to market volatility, valuation calculations, and other factors, preparing early and methodically for retirement in other ways is paramount to your ability to retire with confidence. 

Diversifying a retirement portfolio is crucial to reducing the risks associated with investing in a single type of asset—even if it’s your own business. Working with a financial professional is essential to maximizing your readiness for retirement. A knowledgeable financial advisor can assist you in navigating your unique situation and can help identify specific strategies and tax incentives that could work in your favor.

Retirement Plans for Small Business Owners 

When planning for retirement as a small business owner, you may have specific and unique options available to you. An often favored choice is the self-employed 401(k) plan. This retirement savings method is particularly attractive as it allows you to contribute in two capacities: as both the employer and the employee. 



Contribution Type

2023 Limit

Employee Contribution

$22,500

Employer Contribution

25% of compensation

(see IRS.gov for more info)


Balancing business decisions with retirement goals is no small feat. By establishing a retirement plan, setting and working toward goals, and mapping out a clear exit strategy, you can start planning and making decisions with your ideal retirement in mind.

Selling Your Business

In addition to these other measures, selling your business is a significant step in the journey toward your retirement goals. To effectively engage potential buyers for your business, it's crucial to showcase steady revenue streams, such as those from subscriptions or secured service agreements. Your business's attractiveness will be buoyed if you can demonstrate consistently strong performance and sound calculations behind the price tag. Although profit multiples may be modest in today's market, well-maintained books can command respectable multiples. 

Research is also vital when selling a business. Familiarize yourself with intermediary assistance, tax implications, and the transfer process as a whole. An adequate understanding of the sale mechanism, valuation approaches, and market trends can significantly increase the chances of a smoother transaction and favorable outcome. You don’t have to know or do it all on your own, however. Your financial advisor can walk you through every step of the process.

Developing Your Exit Strategy

Exit planning also requires strategic thinking. Owners must weigh and decide among options such as:

  • Passing the business to the next generation
  • Selling to employees or management
  • Continuing with new leadership
  • A trade sale

Each alternative poses unique advantages as well as challenges, such as finding capable successors, assessing management's readiness, or navigating trade sale intricacies.


Exit Strategy

Challenges

Family Succession

Finding a capable successor.

Management Buyout

Assessing the management’s readiness.

Trade Sale

Managing potential sale disruptions.


Ultimately, your chosen option should align with and help fulfill your vision for a comfortable retirement, while also supporting the health and longevity of the business. Thorough planning and professional guidance can help business owners formulate a plan that facilitates this balance, as well as a smooth transition.

Business Transition Planning

Transitioning out of a business you have likely spent years of your life building and nurturing is usually not just a financial decision but a personal one. Effective business transition planning ideally begins up to 15 years before an owner intends to retire. This timeline accounts for the intricacies of passing the mantle of ownership and leadership. You must consider identifying potential successors years in advance, allowing sufficient time to gauge their interest and commitment to the business's future. 

Options such as an employee stock ownership plan (ESOP) can also help the seller motivate and retain employees by allowing them to become company owners. This can create a win-win situation, offering a gradual transition for the retiring owner while fostering stability in the company.

Formulating Your Succession Plan

To be effective, a succession plan should detail every step of the process. It should outline the key objectives and parameters of the transition, the timeline and stages of implementation, and the contingency plans to address unexpected developments. Ensure your plan is documented and formalized to provide a clear roadmap and to help avoid potential misunderstandings or conflicts. Consulting relevant professionals, such as your financial advisor and legal counsel, throughout this process is vital to ensuring the comprehensiveness and efficacy of your plans.

Start Planning Today

Small business owners need to prioritize retirement planning while also creating a viable business exit strategy well in advance. Creating a comprehensive and customized retirement plan that extends beyond simply “selling your business” is essential to:

  • Cultivating a business environment that thrives independently of your involvement
  • Valuing your business realistically
  • Engaging potential buyers to sell your business
  • Diversifying your retirement portfolio
  • Cultivating the sustainability of your financial future after business ownership

Consider establishing and contributing to a self-employed 401(k) plan, and working with a financial professional to maximize retirement readiness. By developing a retirement plan and mapping out a clear exit strategy, you can start planning and making decisions with your ideal retirement in mind. If you're ready to build or optimize your plan, one of our ProWealth Financial advisors can help you plan for those quieter mornings and a more comfortable retirement. 

 Create Your Exit Plan Today