You may be like a lot of small business owners (39%) and generally plan on selling your business to fund your retirement, especially if your revenue is about $500,000 (52%). Are you also among the 30% that have no succession plan for their company, or the 17% that haven’t even identified a potential buyer? It’s an unfortunate misconception in small business retirement planning to think that just selling a company is a safe bet for long-term goals.
Why You Shouldn’t Rely on Just Selling Your Business...
For a lot of small business owners, their company is their largest asset representing 80% to 90% of their total assets, and they don’t have a lot of money to invest elsewhere. However, banking on the sale of your business alone — especially without a succession plan in place — opens you to a number of risks.
It Might Not Sell.
The market is always fluctuating, and there is no guarantee that your business will sell. In fact, despite the uptick in business selling early this year, only one in five small business sales closed in 2016. Also, the economy needs to be stable enough for the buyer to fund the purchase.
The Value of Your Company Depends on You.
Even if your business isn’t a sole proprietorship, a lot of the value of your company may stem from your actual presence there. That means that without you, its value will decrease greatly, and probably quickly.
It Might Not Provide Enough Funds for the Rest of Your Life.
Believe it or not, waiting to start planning for the sale of your business can impact the price you’re able to get for it when you do finally sell it. This is made worse when most owners (two-thirds) don’t understand the value of their business or incorporate a recent valuation.
Retirement Dates Aren’t Set in Stone.
Nothing in life is guaranteed, and all sorts of unexpected circumstances (e.g., a major illness for you or a member of your family) could force you into retiring much earlier than you anticipated. Because the process of selling the business can take years, if it happens at all without you there, you won’t have a retirement fund at all.
Commit to a Real Retirement Plan.
The best way to ensure your retirement is as well funded as possible is to stick to a real retirement plan. No two businesses or business owners are the same, so you need to be sure to select the best type of plan to provide for yourself and your employees. Recently, we discussed how to determine if a defined benefit plan is a good fit, but there are plenty of other types of plans to consider, from payroll deduction IRAs to profit sharing and the traditional 401k. However, no matter what type of savings plan you choose, you must always develop a solid, written succession plan for your business.
Best Practices for Retirement Planning:
Despite the fact that 62% of small business owners think that they’re saving enough money for their retirement, 47% of them are only putting away less than 10% of their income. Another 25% aren’t doing anything to save at all. Strategize a way to avoid the risks of selling your business to fund your retirement by following these retirement planning best practices:
- Remember that life expectancy is continuing to increase. You may live a lot longer than you think you will, and since most live until 78 years of age, you should plan for at least that long.
- Understand how IRA penalties actually work. You can start withdrawing funds at 59 1/2 years of age, but you’ll need to pay taxes on what you withdraw until you’re 70 1/2 years old.
- Wait to cash out your social security. Working will help raise the amount you receive, plus you can continue to enjoy employer-funded benefits, such as adding to your 401k.
- Forget the old adage that you should avoid spending the principle and live off the interest. It simply isn’t applicable anymore.
- Don’t count on living off of Medicare. Long-term care coverage is a necessity. Without it, you may end up spending at least $250 thousand in out-of-pocket expenses.
As you can see, counting on selling your business to fund your retirement isn’t as dependable as it may sound. With no guarantees on closing the sale, timing, or value, it’s much wiser to have a diversified plan in place ahead of time.