In many countries, retirement benefits are a privilege. But when that golden age arrives, not everyone is prepared to put down their tools and head off to the life of blissful relaxation enshrined in minds of many. This fact is becoming painfully apparent among Baby Boomers.
According to the Insured Retirement Institute, many American boomers are looking to a retirement reality in which they either figure out how to live on half the current median US household income or find part-time employment; all while hoping that their living and health related expenses do not increase. Despite having more options, business owners are finding themselves in a similar conundrum.
Business Owners and Retirement
For business owners, retirement preparation takes a slightly different shape from that of the average worker. Often, owners rely on income from their business to fund their retirement savings. According to the SBA, however, small business owners over 50 are less likely than their employees to have a well-funded pension or retirement plan.
Even among those business owners who contribute to a traditional retirement savings plan, the vast majority of their personal wealth remains invested in the business while their retirement savings pale in comparison.
This seems to leave retiring business owners with one choice: sell the business.
When Businesses Don’t Sell
At this point, you might be wondering: What’s so bad about this strategy? After all, if the owner spent his working years investing in a successful business rather than saving for retirement, it seems that his or her money was well invested.
Fair enough, but the issue isn’t so much with the owner’s decision to invest as it is with the assumptions made about his or her ability to sell the business and at the desired asking price. Much to most business owners’ surprise, most businesses are unsellable for a number of reasons.
According to Wealth Management, in 2013, 12 million boomer business owners were getting ready to retire and flood the market with businesses for sale. 5 years later, however, only 25% of companies were actually sold at asking price. This leaves most retiring owners who have insufficient retirement savings with two main choices: either sell the company at a discount or close the operations and find employment elsewhere.
…But what if there were a third option?
The Gift That Keeps Giving
Ensuring peace of mind for the retiring business owner and the well being of his or her family in retirement ultimately comes down to having the flexibility to accommodate the changing needs of the owner and his or her family. That type of flexibility is nearly impossible without control; maintaining control of the business to allow for necessary accommodations.
For business owners who don’t believe that they run a “family business,” this may seem counterintuitive. However, take a hard look around your business; you may see more family involvement than you previously realized. In that case, you’re already a de facto family business owner.
But this is about more than semantics; this is about practicality. Consciously bringing the family element into the business opens up conceptual space for the owner to seriously consider passing on the business while maintaining control in the family instead of selling it.
Why would a business owner want to travel down that road?
Questions of legacy aside, there are practical reasons why a retiring business owner would consider keeping control of the business in the family:
- Ongoing Income – Depending on the terms of the handover, retiring owners and their successors may be able to formalize an arrangement that allows the retiring owner to receive regular income from the business in exchange for some agreed upon level of involvement.
- Purposeful Involvement – Many retirees struggle with finding purpose through engaging work after their retirement. However, owners may be able to carve out a supporting role in the business that still allows them freedom and flexibility to enjoy their time in other ways.
- Expense Management – Call it a fringe benefit, but there are several expenses (cell phone, vehicle, healthcare) that owners write off as business expenses. Depending on the tax and accounting laws governing where they operate, owners may be able to retain these benefits either wholly or partially based on the level of their involvement in the business.
Preparing For Retirement Peace of Mind
Passing the business from a retiring owner to a family member takes intentional planning to execute the transition smoothly. Still, the benefits are enticing enough for business owners to give it serious consideration.
Are you getting ready to retire? Now is the time to consider whether you’ll be able to sell the business and net yourself the funds you need to survive well into retirement. If you have a competent relative in waiting, succession just might be the best option to let the business that supported you during your working years carry you well beyond.