Money Matters

Retirement Planning for Business Owners

30 May 2024 by: Tina Vieregg  , ,

As a business owner, you’ve meticulously planned every aspect of growing your business. However, working with entrepreneurs in San Diego, we’ve found many business owners often overlook creating an exit plan to support their retirement. While many business owners feel ready to exit, the numbers don’t always align with their timeline. According to the2023 Business Owner Readiness Survey by the Exit Planning Institute, only 41% of respondents have a formal exit plan. Additionally, 50% of business owners don’t know what they’ll do after exiting. This lack of planning often leads to unsuccessful exits and uncertain retirements. We typically recommend focusing on personal finances, business goals, and planning for the next chapter to secure the future you envision and deserve. Let’s explore factors contributing to a successful business exit and retirement.

Should Business Owners Partner with a Financial Advisor?

We recommend consulting with a retirement planning professional as early as possible, ideally at least five or six years before your target retirement date. The benefits include:

  • Time to assess your situation and business value and explore suitable strategies
  • Access to valuable insights and options, helping you navigate your business, personal objectives, and exit 
  • Access to expertise and guidance before accepting sale offers or signing agreements to avoid missed savings, unforeseen tax consequences, or a lack of funds to reach your retirement goals

What Will Life Look Like After Business Ownership?

From our experience, entrepreneurs often overlook planning for life after business ownership. Typically focused on business growth, business owners may neglect crucial personal areas, such as family and friends, self-worth, self-identity, charitable or community considerations, health considerations, hobbies, and fun. As we’ve stated, 50% of survey respondents have little to no plan for life after business, posing a significant issue as their identities are often tied to their business.

From what we’ve seen, planning for these aspects is essential for a fulfilling post-business life. Here are questions to consider:

  • Who will I spend my time with?
  • What is my purpose when I’m no longer growing a business?
  • How will I identify myself if I am no longer a business owner?
  • What will I do with my time?

Personal Financial Planning

Financial planning is key both for the individual and the business at large. It can drive business decisions, and determine how much you need to save during your working years or how much you need to sell for in order to achieve your goals in retirement. Data shows that while 79% of business owners have a written personal financial plan, 21% don’t have anything. 

When helping business owners establish their personal financial plans, we typically focus on income requirements, cash flow planning in retirement, risk management to protect their wealth, gifting to children or charity, long-term healthcare, and estate planning in retirement. Questions to consider include:

  • How much do I need to sell my business or assets for, in order to be financially independent in retirement?
  • Can I achieve my personal objectives without the income from my business?
  • What are my needs and wants?

How Much Savings Do Business Owners Need in Retirement?

Determining how much you’ll need in retirement depends on your unique goals and lifestyle. As many business owners have the majority of their net worth tied up in their business, it’s essential to identify a specific net amount from the sale of your business to support your post-business lifestyle. 

A financial advisor can help you identify your goals, spending, budget, savings targets, and an ideal sale amount to fund your retirement. An advisor can also help diversify your assets and align your business decisions with your personal objectives to help ensure a smoother transition. This exercise provides a baseline measurement of your current value and guides valuation acceleration.  

Business Valuation

A business valuation provides insights into what your business is worth. It also highlights strengths, gaps, and weaknesses to address in your personal finances and the time remaining at your company to reach your goals. Still, survey results show that 50% of business owners do not regularly measure or formally keep track of business value. Conducting a business valuation can help identify a specific list of personal and business actions to mitigate risk, increase value, or enhance transferability. Knowing your business’s worth brings clarity to decisions and their impacts on your business value and personal wealth. 

You can search for valuation professionals locally, with some specializing in certain industries. Please contact our team if you would like to connect with a valuation professional. 

How to Enhance Business Value Before Retirement

To support post-business life, 64% of business owners stated they needed to harvest the value of the sale or maximize profits. They planned to do this by enhancing their financial standing, managing taxes, and maximizing business value. If you’re in a similar situation, here are strategies to consider:

Maximizing Business Value: Rather than focusing solely on income, business owners should focus on increasing overall business value. The transferrable business value is essential for aligning the sale with your personal goals. Consider key areas such as financial health, management and personnel, systems, risk management, growth factors, income streams, and industry benchmarks.   

Enhancing Intellectual Capital: Business owners with transferable value often excel in intellectual capital (e.g., competent talent, reliable customer relationships, technology and systems, and brand values and culture), systems, processes, and recurring revenue, making their business more attractive to potential buyers. 

Protecting Business Value: Mitigating personal, financial, or business risks is essential to safeguard your established business value and build value. Not preparing for the worst, such as the 5Ds: death, disability, divorce, distress, and disagreement, could negatively affect your business’s value, as valuations are based in part on the real and perceived risks from a buyer’s point of view.

Succession Planning for Business Owners

Succession planning involves transferring leadership or ownership of a business, either to the next generation or to another owner. It should begin early in your business journey, or at least five years before your planned exit. There are various paths for exiting your business, each with its own considerations and opportunities. From evaluating external buyers to identifying potential internal successors, a professional can help you explore your options to determine the best path forward. 

Estate Planning for Business Owners

Estate planning for business owners involves more than distributing personal assets; it also dictates the transfer of ownership and management, aiming to minimize taxes, maximize value, and ensure a smooth transition. In addition to healthcare directives and other instructions to carry out your wishes, an attorney and financial advisor can help you devise a plan that includes key aspects, such as:

  • Succession planning to heirs or successors
  • Tax planning to minimize estate taxes, e.g., through gifting and trusts
  • Strategically structuring your assets and ownership to protect your assets

Retirement Planning for Business Owners: How CCMI Can Help

Retirement planning for business owners is a multifaceted process requiring careful consideration and expertise. At CCMI, we understand your unique challenges and opportunities as you build your business and plan for retirement. We’re here to provide personalized guidance and support at every stage of your business journey. Contact us to learn more about how we can help you with your plan to achieve retirement readiness and your goals.

PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at https://myccmi.com/important-disclosures/

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
How can we help you?

As a CERTIFIED FINANCIAL PLANNER™ professional, Tina guides clients in investment and financial planning to achieve their personal goals and objectives. With an extensive background working with registered investment advisors, Tina holds a wealth of knowledge in portfolio strategy, investment selection and best practices, competitive analysis, and building complex financial plans. She has also obtained her Behavioral Financial Advisor designation.

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