By John Donovan
For people who work in a corporate job, retirement is straightforward: File the paperwork, collect your benefits and go.
For a small business owner, retirement requires much more planning and preparation. That’s because you need to have a retirement savings plan along with a plan for selling your business, or for transitioning it to a new generation of ownership. Yes, you need both.
Why? It’s important to know that, even if your business has been successful, not every small business will find a buyer. A recent study by the Exit Planning Institute found that while some 4.5 million firms could be up for sale in the next decade because their owners are reaching retirement age, only 20 percent to 30 percent of these businesses will end up selling. If your business is one of those that doesn’t sell, how will you exit and how will you retire?
In order to do retirement right as a small business owner, you’ll need a success plan and a retirement savings plan. Here’s how to think about both:
Start saving for retirement now:
Even if you’re not anywhere close to retirement age, you can and should set up a retirement savings plan. You’ll be in the minority on this, but that’s OK. (While individual and small business retirement plans have been available to small business owners for some time, very few take advantage of them.) The most common small business retirement plans are the Simplified Employee Pension Plan (SEP IRA), the Savings Incentive Match Plan for Employees (SIMPLE IRA) and the Self-Employed 401(k). The IRS has information on each and you can even watch a simple webinar on your options. Pick the plan that’s best for you and your business now, and make a commitment to putting money into your plan every year. And know that, whatever option you choose, you don’t have to manage it by yourself. There are many third-party administrators of small business plans now.
Calculate your retirement living costs:
This step requires you to think about where and how you will live once you are no longer running your business. Some people will eagerly move from a high-cost location to someplace that’s easier on the wallet, but not every retiree wants to do that. If your succession plan (see step 3) calls for you to stay on as a consultant to your business after you sell or transition, you may not be able to. There are free retirement living cost calculators on just about every personal finance website, as well as on the websites of retirement savings companies like Fidelity, Rowe Price, TIAA and Vanguard. Pick one, and run your numbers.
Write your succession plan:
Last but not least, plan the transition of your business. A 2015 survey by CNBC and the Financial Planning Association found that while 78 percent of small business owners intended to sell their businesses to fund their retirement, fewer than 30 percent had a written succession plan. If your plan includes turning the business over to your children and they are not buying the business outright, you’ll need to think about how you will draw your equity out during retirement. If your children don’t want to lead the business, or you think your retirement income could be in jeopardy if they do, your plan might look to one of your employees for leadership. (You can retain family ownership while allowing this employee to run the business.) If you’ve been in business a long time, you likely have substantial equity in the business, which could mean a substantial sale price. If that is too high a price for a family member or employee to bear, remember that, instead of an outright sale, you could structure the transition as a gradual sale or a lease. The U.S. Small Business Administration’s 7(a) loan program—which is available through both traditional and alternative lenders—can help a qualified buyer finance the purchase of a business over as many as 10 years.
John Donovan is the CEO of Bizfi, the leading fintech company with a platform that combines aggregation, funding and a marketplace for small businesses, and has more than 25 years of financial technology experience building companies and launching products within organizations. Since 2005, Bizfi has originated in excess of $2 billion in funding to more than 35,000 small businesses, including many well-known franchises. @Bizfinyc.
