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Before the Transition: What Every Small Business Owner Needs to Know Before Retirement

May 6, 2019 | Sam Rouman, CFP®, CLU, ChFC, AIF®

Congratulations! You have made the decision to sell your business and retire – great! You have built up your business, been successful in creating wealth and are now ready to enjoy the fruits of your labor.

Now what? Are you ready? Do you know what ready means?

There are several aspects of your decision that you need to take into consideration and not all of them center on financial planning. A well-rounded retirement plan includes a financial plan, a budget and a plan for how you will spend your newly found free time.

In this post, we are going to focus on the financial piece of the plan. Let’s start with some assumptions:

  • You are truly retiring.
  • You are not going to buy another business.
  • You are going to live on the assets you have accumulated and the proceeds of the sale of your business.

There are a variety of reasons a business owner makes the decision to transition out of business ownership and all bring unique things to consider. Changes in your life such as your health, marital status or other changes in your family dynamic, or simply reaching the age to be eligible for Social Security are all reasons to take a pause and reflect on your future plans.

Just like when you were running your business, you had a plan. Sometimes your plan happened as intended and sometimes it did not.  You made corrections along the way and moved on.  A post-business personal financial plan works in much the same way.  Some of what you expect will happen, and some of it may not.

Your Homework – Four Things to Consider

  1. What will retirement cost? Do you know how much money you need to live, and live the lifestyle you have chosen? Many business owners live their lives through their business, often not making a distinction between the day-to-day activities of the business and their personal life. This includes running some expenses through their business, such as vehicles, insurance and more, all normal in the course of the business.  Now that the business is not there you are left with a stream of payments or a lump sum with which to live on.  Will this be enough? This is where a plan comes into place, best provided by a professional financial planner.
  2. Prepare for selling before you sell. This seems simple enough but you need to quantify your financial situation. Here are some things to consider:
  • Many business owners have more than half of their net worth tied to their business.
  • Cash flow during the ownership years often covers expenses that will need to be paid from personal resources once the business is sold.
  • Do business owners clearly understand their cash needs after sale?
  • What if the proceeds from the sale of the business are not certain to cover living expenses?
    • Consider options for increasing the value of the company prior to sale by bringing in resources to grow the company’s sales, profit and value
    • Consider an alternate structure to selling outright
  • Succession planning. If the business is staying in the family, it can be a delicate balancing act to transfer ownership and there are also many financial decisions and tax implications that need to be considered.
    • Who benefits? All family, children and in-laws or only those that are active in the business
    • Can a sale be staged over time, or in phases?
    • What parameters and milestones need to be achieved in order to complete the transition?
  1. Timing – When to Sell?
  • Are you being forced to sell due to health or other issues?
  • Do you have partners that are involved in the decision?
  • Is the timing dependent on you, or is the marketplace for your company particularly strong right now?
    • Timing the Market – what does it mean?
      • Do you feel confident about the market for your business?
        • If yes, what are the steps needed to complete a sale?
        • If no, what are you going to do better understand the market? Perhaps consider hiring a business consultant, a broker or both.
      • Keep in mind when major trends are up, there are more qualified buyers and you could obtain a higher price or better terms.
  1. Retirement Checklist. These are all things to do before you make the final decision to sell the business and enjoy a successful retirement:
  • Build up your emergency fund savings account
  • Make a retirement budget and make an investment plan that supports that budget
  • Determine your health insurance options and learn Medicare basics
  • Make a retirement income timeline and understand how this income will be taxed
  • Use a Social Security calculator before you claim benefits and understand how working might affect your benefits

BerganKDV has a team of financial advisors who can help you navigate all areas of your financial life as you prepare for, enter into and live in retirement. Want to learn more about what we can do for you? Start here.

The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.

 

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