Retirement for the Small Business Owner: Is It Even Possible?

Here’s the fatal flaw in the retirement plan of many small business owners: after pouring a lifetime of sweat, time and capital into building their businesses, their rough-sketch exit strategy is to sell out someday for a ton of money—and then settle back and enjoy a financially secure retirement. Many business owners are so sure this will happen that they don’t bother to make any other retirement plans. And that’s a big mistake. Why? It’s an undependable fantasy that depends on a magical person who, at just the right moment, swoops in with cash in hand to buy your company–and pay a fair price. The reality: for thousands of small business owners each year, no one steps forward. Perhaps your business is too specialized or is tied too closely to the owner’s unique personality and skills. Or perhaps possible buyers equate retirement sale with distress sale and make only low-ball offers. Whatever the reason, many small business owners find that their companies have suddenly become a white elephant that nobody wants.

A Realistic Exit Strategy

Here’s an idea—and one possible solution to the small business retirement conundrum: groom your own replacement. Hand-select that special someone who will buy your company when you’re ready to retire. Maybe this person is a current co-owner (but be careful if he or she is about the same age as you, who will be counting on retiring around the same time.) Or it could be a son or daughter active in the business or a younger key employee.

Don’t Leave Your Retirement to Chance

By grooming your own replacement, you leave no room for error at the point of retirement. Here are some steps you might take:

• Be cautious. Make sure your heir apparent is the right person in terms of temperament, personality, competence, personal goals and age.
• Set up a probation period. Have a way out if you find this person simply won’t work out. During that period, keep everything informal, strictly verbal. At the same time, even when you enter a formal agreement, make sure it contains a termination provision.
• Keep them intrigued and engaged. Consider fashioning some golden handcuffs and incentives to ensure that your replacement stays until the baton is officially passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership before retirement. This gives both of you something to win by sticking to the agreement… and something to lose if it falls apart.
• Put it in writing, along with the help of an attorney. Lock in who does and gets what, and spell out all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.
• Build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the plan. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work. but they leave much to chance. Instead, consider a funding vehicle that protects your family in the event of your disability or premature death, such as life and disability income insurance.
• Have back-up plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or—all too common—leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it’s simply best to dismantle the business.

Whether or not you have a possible successor for your company, you should begin mapping out your retirement strategy today. Your insurance professional or your independent professional advisors can help you develop this kind of business strategy.