Making the transition to business ownership

One day you’re running a business and working to build your nest egg. The next, you’re retired and working to protect it.

The shift in gears can seem abrupt. But it doesn’t have to be, particularly if you begin preparing for this transition years in advance.

The problem is, many business owners are reluctant to look too far into their futures. Retirement planning forces them to consider not only their own mortality, but also who should succeed them, when to make their intentions public and how to ensure their financial security in their retirement years.

Because so much hangs in the balance, it is almost never too early for business owners to begin planning their own exit strategy. The payoff for being proactive can be substantial.

Generating retirement income

Early planning can help assure you have the retirement income you need if the business is passed to the next generation. If you’re like many small business owners, most of your money is probably tied up in your business, including the funds you plan use for retirement.

The challenge is figuring out how to turn those business assets into a retirement income — particularly if you intend to keep the business in the family. In that case, you will need to develop a strategy for transferring ownership in a way that works financially for both sides. There are several effective ways to structure such a sale. But few involve a single, lump sum payout.

You should begin acquainting yourself with your options at least five to 10 years before your expected retirement. But don’t stop there. Regular sit-downs with your banker and accountant should include discussions of your business’s value and how any changes impact your future retirement income.

Binding family ties

Early retirement also can strengthen family ties. One of the biggest reasons family businesses often don’t remain so is because family members don’t get along.

Retirement planning alone won’t solve family rifts. But the process can force you to address uncomfortable issues you might otherwise avoid. As former Carnegie-Mellon professor Randy Paush put it, “When there’s an elephant in the room, introduce him.”

If family members disagree on their roles or the direction of the company’s future, for example, acknowledge it. By being proactive rather than reactive in addressing difficult issues, you take more control over the outcome.

Involve a trusted adviser in the process, and you may also be able to resolve conflicts more amicably than if you allow them to fester. Together, you can honestly assess whether your family’s long-term interests are better served by transitioning to a new generation, or selling to senior management or outside third parties.

A properly designed retirement plan can result not only in a stronger family, but also a potentially wealthier one. For example, there are many things you can do to significantly reduce your estate and gift taxes, even while you still have control of your company. It’s better to learn about these when you’re 55 rather than 65.

Building value

A retirement plan also can build a more valuable business. With only one in three family businesses passing to the second generation, chances are good that you might seek an outside buyer for your business. That is, of course, if you are able to find a buyer at all.

The fact is, less than 25 percent of business owners are able to sell their businesses when they are ready to retire. Often, it’s because they decide to sell at the wrong time — when their industry is in a slump, after new competitors have taken market share, when their health fails or other changes have made their business vulnerable.

Early retirement planning cannot eliminate these risks. But it can allow you to put strategies and contingencies in place for managing them. It can also prepare you should potential sale opportunities arise.

Getting a business ready for sale, incidentally, can take years. The ones that command the best prices are those that are ready to be sold at any time. Any major decision you make about your business, therefore, should be made with a potential sale in mind.

This isn’t just smart retirement planning, it’s smart business planning.