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Five things you will need to do to retire your business
Deciding to retire from your business is a big decision. Every business owner should have an exit strategy long before the decision day arrives to sell, merge or sell the business. As it is likely the largest asset you possess, getting things right is critically important. While there are a myriad of details to consider, here are five of the big concerns you should put on high priority as soon as possible, regardless if your retirement is five years or five decades from today.
ONE: Look at Your Business as a Spectator
It sounds weird, but taking a mental step back from your daily operations in order to see your business as an interested spectator is a great way to understand how your business operates—and what might need to change—in order for you to successfully ease out of the company. Every business is unique. Ideally, you began thinking about your exit strategy the day you took the owner’s chair. What needs to happen to replace you as the chief? Consider the operational, sales, and leadership aspects of your position:
- Is there a clear leader who can replace you? Is that person interested in ownership?
- Are there functions that might need to change without you there? Can other people be trained?
- Will you need to bring in managers to build a layer of operations to permit the company to run without you there?
As a spectator, you may also see that your business might fold strategically into one of your competitors. On the other hand, you may discover that it can operate without you, and maybe a prospect for an employee buy-out (ESOP) or a key employee buy-out. Your self-examination gives you the information and shopping list needed to move your business into position for transition.
It may also be time to start having conversations with employees, friendly competitors, and others to understand what options might work, and what is off the table.
TWO: Determine Your Current Business Value
Some people have built a business; others have found a way to work for themselves, but their company has no (or very little) value without their direct participation. The difference can sometimes be tough to determine and might be a bitter pill to swallow if you discover the business you thought you were building was really just a job.
The point is, it is important to understand the actual potential value in the marketplace every few years and to understand when it may be time to cash out, even if it might be a couple of years shy of your planned work retirement. Talking to a valuation specialist, or a business broker will also help you understand if you built a job or a company that has value beyond your physical presence.
In addition, understanding the value of your business broadens your perspective. Through the lens of a buyer, you might suddenly understand that your business is missing new services and products that enhance its value and move you in new growth directions.
THREE: Assess Your Retirement Spending Needs/Goals
Accountants always worry that their client’s lifestyle and habits are often detrimental to their future wealth and retirement. Just like having the difficult talk about your will and estate, it is very important to periodically assess your retirement spending plans, needs, and goals. Think about your lifestyle and what might need to change. If you live in a big house or a state with a large tax bill, can you and your family be happy moving to a more retirement-friendly state? Do you need to begin purging unneeded things in order to move to a smaller space? Is your credit card always melting from overuse? Are there other substantial debts that need to be addressed before you stop drawing an income? If your lifestyle cannot be funded under your retirement budget, it is a guaranty that you will burn through your savings in your advanced years. Establishing your monthly/annual spending and household budget isn’t fun, but it will provide for frank discussions about how much you need in retirement, and lets you know what you will need to extract from your retirement savings and your business exit when the time comes.
If building a budget is a task that never happens, it may be time to reach out to your accountant for assistance.
FOUR: Determine Your Retirement Horizon
Some people say they will “die with their boots on” while others think it would be perfect to be sitting in a beach chair sipping cold drinks on an island somewhere full-time by age 55. Whatever your dreams are, now is the time to determine your retirement horizon. How many years will it take to earn enough to fund your dream retirement, and what is your retirement age goal? If those two things don’t match up, it is time to make adjustments to your plans. Increase savings. Perhaps take a few more investment risks. Look at business opportunities that will grow the business to where it can fund that goal. Of course, it may be time to become more frugal in spending habits, and lastly, it may be time to realize your goals may be too rich for you to reasonably achieve. Again, your accountant can help guide you through this process and give you the tools you need to be financially successful.
FIVE: Examine Your Assets and Retirement Savings—Are your strategies up to date?
Once you have examined the potential value of your business and assessed your spending needs as well as your budgeting goals, it is critically important to do a complete review of your retirement assets to determine if your savings plans are on target. Your accountant and your financial advisor can be extremely helpful in determining your savings needs and risk tolerance as well as determine if you need to make adjustments in order to reach your goals. Are there alternative investments that might help balance your need for guaranteed cash? Do you require life insurance to help pay for estate taxes and other expenses if you or your spouse passes away unexpectedly, leaving your assets at risk? Periodic reviews of your savings and security plans are important because everyone’s life and priorities change over time. Children grow and have babies of their own. Quite often, we see a client’s plan to move to another state upon retirement are abruptly altered when the first grandchild arrives. Your health may change. Your business may become too much to handle as you age. Of course, the investment marketplace is always changing, and your excellent plans may need to be revised. The fact is, life has a way of playing havoc with your plans, so a periodic review with your accountant and your financial advisor (and of course your lawyer) are simply smart investments in time every few years.
If you would like to learn more about business succession planning, please feel free to contact one of your professionals.