By Jeff Stoffer
Learn more about Jeff on NerdWallet’s Ask an Advisor
It takes dedication, determination and smarts to create a successful business. Like all working people, business owners also need to think about the future. When they will stop working or cut back to devote more time to family and other pursuits? What is the exit strategy?
Many business owners assume that the effort spent building their business will simply be transformed into a retirement solution by selling it when the time comes. They will be set for life. The truth is that many stars must align to realize this dream.
Business owners are uniquely vulnerable to misconceptions and assumptions about retirement, which can get in the way of a secure financial future. Here are just a few of them.
1. If I execute my business plan, my retirement plan will be taken care of.
This is an understandable assumption, particularly during the early years when we put heart, soul and capital into our “baby.” The intention is to create sufficient value in the business now so that it will fund the retirement plan later. But, what exactly is that plan? This kind of vague thinking doesn’t really address the question of how the value put into the business will be extracted. Establishing tax-deferred retirement accounts early on and funding them religiously is one way to avoid over-reliance on the business itself
2. I know the value of my business (at some unspecified point in the future) and believe it will be enough for retirement.
Mike Van Horn, a small business growth advisor in San Rafael, Calif., cautions, “Our businesses are always worth less than we think they are.” This common misconception is a particularly dangerous one because prices change all the time. What a potential buyer might be willing to pay for your business is based on many factors. What are the drivers of value in your business? Profit growth, margins, competitive advantages and more all contribute to this calculation. Also, it is difficult to predict even five years ahead. Overconfidence about the worth of your business could yield an unpleasant surprise.
3. I will be able to sell the business to support myself in retirement.
What if an outright sale isn’t possible? Is the business capable of generating sufficient cash flow to support you while others run the operation? If you end up transferring ownership to a family member, how might that impact your plan to retire? As we look more closely at this last assumption, we see that there are many possible scenarios, each with different implications for retirement planning.
If these retirement issues resonate with you, you’re not alone. Making your business the cornerstone of a retirement plan can be risky. Because you’ve invested so much of yourself into creating value, it’s easy to assume you’ll be able to get that value back out when you are ready to retire. Knowing what the business might bring at sale is one thing, but having alternative plans is wise. Generalizations about the business funding retirement are no substitute for concrete plans and a detailed strategy to ensure a financially secure retirement. If you really want to retire in five years, you need planning today.