your business
Retirement written on a timeline printed on a paper with a blue pushpin, concept image for changes after work life.

By Jim Salmon

Within the next three years, according to the U.S. Census Bureau, 19 million baby boomers will reach retirement age. About 10 million of these retirees are business owners — which means boomers have a lot of decisions to make in the near future!

As one of the leading subsets of the population, the financial decisions baby boomers make represent a large-scale investment – both for the U.S. economy and for the boomers themselves. To leave a positive impact on the local community, small business owners should be prepared well before it comes time for retirement.

Here at Navy Federal Credit Union, we know how important small businesses are, especially to the ones that own them! We’ve developed three important considerations when it comes to the retirement of small business owners.

Keeping it in the family

People feel very strongly about working with family, they either love it or they don’t. If you’re one of those who “love” it, consider selling or passing down your company to a family member or someone else close to you. As scary as this may sound, you may find that turning over your business to someone you know will help with the transition period. This way, you can still be kept in the loop if you’re not ready to completely cut ties.

One main benefit of passing your company onto a family member is the ability to gift the business, rather than have it be an outright sale. There are many ways to gift a business to a family member, one of which is a grantor retained annuity trust. This is where an owner can gift the business and take an income annuity back for a number of years. If you choose to go this route, it’s important to note that there are tax implications, such as estate and gift taxes, when it comes to transferring ownership to a family member. Be proactive with the transfer process so you can prepare for any tax obligations that may arise.

Passing down your business

Although retirement may seem far from now, you should begin planning for it at least five years ahead of time to ensure your business is left in the right hands. As you know, a business owner should always be thinking about next steps for the company.

Choosing, training and implementing a successor takes time, so set your business up for success by planning for this phase in advance. By putting together a succession strategy, and incorporating it into your larger business plan, you will ease not only your own stresses ahead of retirement, but also those of your employees and customers.

It’s important to discuss your succession plan with any relevant stakeholders to ensure everyone is on the same page when it comes time for your retirement. If possible, identify your successor early on so they can get accustomed to the company to allow for as little change to the business structure as possible.

Selling your business

You’re the only one who fully knows how hard you worked to build your business, so you may be interested in selling your company rather than gifting it or passing it down. A sale can be accomplished with a well-thought out plan and timeline.

There are two different ways you can go about selling your company. These include:

  • Outright sale: Ownership is fully transferred and you receive a payment for your company right away.
  • Gradual sale: Ownership is transferred and the previous owner (you) no longer runs the business, but will receive a monthly payment from the sale until the sale is paid in full.

It’s best to enlist the assistance of a small business broker or an accountant to determine a value for your business. This is important to ensure a potential buyer is paying an appropriate price and can help level set your expectations for what this price will be. This may also allow you to adjust your business operations and structure to possibly derive more value when it comes time to sell.

Regardless of which turnover method you choose, make sure all your finances are in order as your retirement date approaches. Gather your business plan, income tax returns, financial statements and legal documents, such as a business license, registration, any copies of financial commitments your business might have, and a sales agreement detailing the assets and property being transferred. Having these will ensure a smooth transition for both you and your successor.

Although it can be difficult to think of walking away from a business you’ve worked so hard to establish, every small business owner needs a succession plan.

By using these tips, you’ll be able to more easily determine your course of action – and the necessary steps to take – so that you are prepared to pass along your business when it comes time to retire. Your employees and customers will thank you when they see the smooth transition!

By Jim Salmon, VP of Business Services for Navy Federal Credit Union, the world’s largest credit union.