Business owners are particularly vulnerable to some misconceptions and false assumptions about their retirement. Let’s address a few of these issues…
It’s easy to fall into this assumption when you’re putting your heart and soul (as well as your money) into your business. The idea is that you will create enough value in your business that it will fund your retirement later. But that’s some pretty vague thinking; and if a specific plan is not in place, chances are good, that idea just won’t work. It’s wise to establish retirement accounts and fund them consistently instead of relying too heavily on the business itself. Have a plan B in place just in case plan A doesn’t work. It is better to be over prepared than under prepared.
Most business owners are disappointed to find out that their business is worth less than they think it is. The amount that a potential buyer might be willing to pay for your business is based on a multitude of factors and prices (i.e. value) can change all the time. Many owners also fail to factor in their own daily contributions to the business. If they’re no longer running the business, that means that a potential investor who doesn’t want to run the business themselves would have to hire someone to run it, which affects the bottom line and ultimately the value. The point here is don’t rely on someday down the road your business may be worth a lot at the time of retirement.
Some business owners believe they can just sell the business when they are ready to retire. But what happens if selling the business outright is just not possible? If it’s not, you might have to consider some sort of owner-financing option. In this case you would need to consider whether the business can generate enough cash flow to support you when you are not personally running the operation. Remember you won’t have a lump sum of cash to work with if you cannot sell outright.
The key here is not to rely on the sale of your business being an easy transaction or one which will support you fully in retirement.
In theory, relying on your family running your business may make sense. Reality may not prove that theory to be reliable. Family business transitions sometimes go beautifully for everyone involved. Other times, assumptions are made by one or both sides of the transaction and things don’t turn out as successfully as planned. New owners do not always agree on the direction of the company. Sometimes emotions just plain get in the way. Despite the phrase, “it’s just business”, it’s never “just” business in a family run business. To the contrary, everything is personal.
Even if a business is staying in the family and you think that everybody is on the same page with how things will work, it’s still important to have everything officially documented in writing and vital that you have a solid plan for how your retirement income will be generated.