Small Business Owner Retirement Strategies: Setting Up for Success

Are you the owner of a small business and considering a sale to help fund your retirement? If so, you may want to start thinking about your exit strategy and, more specifically, how the proceeds from the sale of your business will factor into your retirement.

When it comes to small business owner retirement strategies, planning ahead is key. In this article, we’ll outline what you need to focus on when preparing to sell and how the proceeds from the sale of your business will factor into your retirement savings.

What Is the Ideal Small Business Owner Retirement Strategy?

When it comes to retirement, the ideal strategy would be for the sale of your business to be the “icing on the cake.” At this point, your retirement accounts are fully funded. You could retire tomorrow without needing a penny from the sale of your business.

You may have accomplished this by setting up various retirement plan options during your time running the business. There are many different types of plans available. The kind of plan that you’re able to establish depends on your business structure. (For instance, whether you’re a self-employed sole proprietor or the head of a C corp.) 

Depending on your business structure you may have set up one or more of the following retirement accounts:

  • Self-Employed IRA (SEP IRA)
  • A savings incentive match plan for employees (Simple IRA)
  • Solo 401(k)
  • Simplified employee pension plans
  • Defined benefit plans

In order for you to achieve this retirement strategy, you need to get started sooner rather than later. Though there are rules about catch-up contributions, the odds are that you won’t be able to fund your account enough to have a viable retirement income. Consider speaking with a trusted financial advisor and/or tax advisor to learn more about the types of retirement savings plans that you can set up for yourself and your eligible employees.

You may also put your money in other retirement accounts outside of the business, such as real estate or individual retirement accounts (either Roth IRAs or traditional IRAs). Using multiple accounts could be advantageous, as you may run into contribution limits and differing withdrawal requirements.

Once you’ve reached your retirement nest egg, you can either sell your business or continue to run it for excess cash flow. Ideally, your retirement would be 100% funded before you sell your business. That way, selling your business is extra on top to help pad your own retirement.

What Are Other Small Business Owner Retirement Strategies?

Co-workers brainstorming in their office

While the small business owner retirement strategy listed above is ideal, it may not be feasible. If you’re like a lot of owners, you’ll need to sell your business to fund your retirement in some capacity.

If this is the case, be mindful of a few things. First and foremost, you’ll want to be aware of the valuation gap. This gap occurs when the seller believes their business is worth more than it is on the open market.

Subsequently, the valuation gap could derail your retirement plans. If you’re counting on receiving a certain amount of money when selling your business, but buyers aren’t willing to pay that, then you may not have enough for retirement.

Additionally, you’ll also want to be aware of the potential tax implications that will come along with the sale of your business. Selling your business will not be tax-free, and depending on how you receive the funds from your sale, you may face a stiff tax penalty. For instance, if you receive a salary deferral, you’ll lose out on short-term investable income but you’ll reap tax advantages by lowering your annual taxable income.

Because of the potential tax implications of the sale, you’ll want to work with trusted business advisors, certified public accountants, and certified financial planners to determine the best way to collect a payout from your sale.

These individuals can help you estimate what your net proceeds will be from your sale. Your net proceeds will become your investable assets in retirement, so it’s important for you to understand just how much investable cash on hand you’ll have after selling your company.

When Should You Start Planning for Retirement?

When it comes to planning for retirement, you’ll want to get started as soon as possible. Doing so allows you to:

  • Choose one of the available retirement plans for small businesses
  • Understand your deficiencies and build the value of your business
  • Prepare for your exit

As mentioned, there are numerous retirement plans available. By figuring out a retirement plan early on, you can choose one that benefits both you and your employees. While this is not something you need to worry about as a self-employed individual, it is something to be mindful of if you have employees.

If you choose to set up a SIMPLE IRA and thus make employer contributions, you may be able to reap tax benefits. These matching contributions are tax-deductible, which can impact your personal ability to save for retirement. By planning for retirement early, you’ll be able to set up a plan that meets your goals.

Additionally, preparing for retirement allows you to increase your company’s value so that you can sell it for as much as possible. You can do so by having business advisors conduct annual valuations. Even if you don’t think that you’re close to selling, an annual valuation can help you determine how your company compares to competitors and what your business is worth on the open market.

If your business is not worth as much as you’re expecting, you can work to address deficiencies and increase its value. Working with a merger and acquisition (M&A) advisor early on allows you to receive advice on running the business in such a way that it will be attractive to buyers when you’re ready to sell.

Lastly, getting started allows you to craft your exit plan and, more importantly, your plan for life after you sell your business. There are studies that indicate business owners regret selling their company. However, this regret often has nothing to do with money. It comes from the fact that they didn’t plan for what they would do with themselves once they no longer had a business to run.

If you’ve worked hard and built a start-up or successful company, you may feel a void when you sell your business. Thinking about what you plan to do post-retirement can put you in a better position when the time comes to sell.

The Earlier You Prepare to Sell, the Better Off You’ll Be

When it comes to small business owner retirement strategies, the best one is the one that allows you to achieve your goals once you stop working. This, of course, is multifaceted. But one of the most important components is ensuring you have enough cash on hand to fund your retirement.

Ideally, your retirement accounts will be fully funded before you sell your business. Otherwise, you may not receive enough from the sale to fund your retirement. The sooner you can speak with business advisors and start preparing for retirement, the more likely you are to put yourself in a good position for retirement.

If you’re looking for trusted business advisors to help you come up with your retirement strategy, be sure to reach out to the team at Allan Taylor & Company. From annual valuations to preparing for a sale, the team at Allan Taylor has the experience needed to help prepare you for retirement.

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