Entrepreneur’s Guide to Retirement


If you plan to fund your retirement by selling your business, this is for you. Secondly, if you are an entrepreneur with a growing business and curious about starting a corporate retirement plan, this is what you need to know. The Entrepreneur’s Guide to Retirement is going to provide you with actionable ideas and strategies to help you achieve pre-retirement peace of mind. 

According to the Small Business Association, a U.S. government agency, there are 28 million small businesses in the nation. For many of these entrepreneurs their business may be their single largest asset and 78% of them plan to sell their company to fund more than 60% of their retirement, according to the Financial Planning Association.

Therefore, being unaware of your business’s true valuation may limit your opportunities and push back retirement. Often times, entrepreneurs look to cash out of their business by selling shares to current management or transferring it to family members.

In both instances, business owners need to have a succession plan and exit strategy on paper long before they plan to retire. The two key factors to business transition success is making enough time to plan and having an adequate strategy in place. This may seem obvious but according to U.S. Trust 71% of baby boomer and mature business owners don’t have an exit strategy in place.

Don't Have An Exit Strategy

In addition, just 25% of private business owners have any kind of succession plan in place according to PWC. The goal of a succession plan is to allow a business owner to continue to conduct operations in the event of a key individual’s departure, whether that departure is planned (such as through retirement) or unplanned. While business succession planning is critical to the survival and stability of any business, it also is crucial to the retirement goals of millions of aging baby boomers.

Starting Your Plan 

The best strategy starts with determining what you want from your business. Where do you want to be in three, five or even ten years? How long do you want to remain involved with your business before and after the sale? Another factor to consider is your employees, primary customers and key relationships. When is the appropriate time to communicate your succession plan and exit strategy? What will happen with your company’s retirement plan and what are your options?

All of these challenges have proven to delay retirement for business owners, on average they anticipate retiring later (73 years old) than traditional employees (68 years old) according to Small Business Administration Office of Advocacy.

Whether you are considering transferring your business interest to family members, selling your shares to an outside party or current management, review these important steps.

Run Your Numbers

Ask yourself, what is your business worth? Valuing a business the day you receive an offer or decide to sell is like planning your retirement the day you decide to retire, you may be left out in the cold.

Business valuation is often one of the most challenging tasks for a business owner because of the time, energy and passion put into the business. Determining a true and accurate value is difficult to gauge without professional guidance.

Begin by updating personal finances, valuing real estate and retirement accounts. How much money will you need to maintain a quality retirement lifestyle? Do you have a corporate retirement plan in place that aligns with your exit strategy? Who will execute your plan throughout retirement and make your vision a reality?

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Design Your Retirement Vision

Spending time on your personal finances and organizing your family’s assets will help you objectively prepare for the transaction of a lifetime. Begin by creating short-term and long-term financial goals for yourself, then track your progress using an online account aggregation software, we recommend BlueLeaf or Advizr. In the words of baseball legend, Yogi Berra, “If you don’t know where you’re going, you may not get there.”

For many young entrepreneurs though, selling their business isn’t top of mind and neither is retirement. We understand that, so considering what corporate retirement plan structure is best for your business and employees is a great first step.

Use the Proper Retirement Plan Structure 

One perk of entrepreneurship is that you have more options than an employee to save for the future. However, only half of business owners are taking advantage of the many benefits business specific retirement plans offer. Research reveals that 47% of small business owners do not have a retirement plan in place, according to TD Bank.

Choosing the right retirement plan structure for your business transition takes careful consideration. Each plan has different characteristics like contribution limits, administrative responsibilities and requirements for employee participation.

The five types of retirement plan structures for business owners:

1. Simplified Employee Pension Plan (SEP IRA): Available to sole proprietors, partnerships, C corporations and S corporations. The key advantages is easy set up, maintenance and flexible annual funding requirements.

2. Savings Incentive Match Plan for Employees (SIMPLE IRA): Available to partnerships, C corporations, S corporations and with 100 or fewer employees.

3. Self-Employed 401(k): Available to self-employed individual or business owner with no employees other than a spouse. The key advantage a 401(k) with potentially higher contribution limits than SEP IRA.

4. 401(k): Available to partnerships, C corporations and S corporations. Most appropriate for companies with 20 or more employees.

5. Employee Stock Ownership Plan (ESOP): Available to C corporations and S corporations, excellent for business ownership transition in medium sized companies. Learn more about ESOPs.

The three most common small business retirement plans are SEP IRA, SIMPLE IRA and Self-Employed 401(k). They each offer certain tax advantages, including:

1. Tax-deferred growth potential, which allows contributions to grow without being reduced by current taxes.

2. The potential to deduct employer contributions as a business expense.

3. A tax credit of up to $500 for certain expenses incurred while starting and maintaining the plan each of the first three years, if this is your first time offering a plan.

However, each plan has different features, particularly about whether the plans cover employees and, if so, who is responsible for making contributions.

SEP IRA: Contributions are made by the employer only and are tax deductible as a business expense. The maximum contribution can’t exceed 25% of the employee’s net compensation or $54,000 in 2017.

SIMPLE IRA: Funded by tax-deductible employer contributions and pretax employee contributions [similar to a 401(k) plan] allows business owners and employees to contribute.

Self-Employed 401(k): The most generous contribution limits of the three plans, but is suitable only for businesses with no “common law” employees, meaning any person working for the business who does not have an ownership interest.

The good news is all three of these plans are relatively low cost and easy to start. Selecting the best plan for your business ultimately depends on how many employees you will hire during the lifetime of your business. Moving forward, save yourself time and hassle by bringing the right people together for your retirement.

Assemble Your Team

Regardless of the size of your company and complexity of the eventual transaction you may need legal counsel, a business broker, an accountant, and of course, your Financial Advisor (preferably fee-only).

Select an attorney well-versed in the intricacies of purchase and sale agreements and wealth transfer. You likely already have an attorney you work with on contracts, litigation and other legal issues, but it’s a good idea to find an attorney who specializes in business succession.

Hire an accountant with extensive experience in minimizing the tax impact of monetizing or transferring a business. In addition, you may need an investment banker, business broker and/or third-party business appraiser to analyze your business and the competitive environment so that you can arrive at a realistic valuation. These professionals can also provide valuable input in structuring your transaction.

5 Tips for Successful Team Building

No matter what your time horizon to transition your business, the time to start planning is now.

Schedule your appointment easy and fast.

Produced by Tim Hooker, AIF® | 1-844-397-7767 Ex. 1

1: Source: 2015 FPA/CNBC Business Owner Succession Planning Survey

2: Source: U.S. Trust http://www.ustrust.com/ust/pages/insights-on-wealth-and-worth-2016.aspx

3: Source: PricewaterhouseCoopers, Family Business Survey 2015, http://www.pwc.com/us/en/private-company-services/publications/assets/pwc-family-business-survey-us-2015.pdf

3: Source: 2015 TD Bank https://mediaroom.tdbank.com/2015-05-04-New-Survey-Finds-Small-Business-Owners-Uncertain-About-Retirement-Plan-Finances

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