Retirement planning is more complicated for business owners than it is for other people because they have to consider both their own future and that of their companies.
The possibilities are more numerous if yours is a mid-size company with revenues above $200 million, says Martin Richards, enterprise client coverage executive for Merrill Lynch Global Wealth Management. In that case, selling a minority stake in the company to a private equity firm is on the list of several good possibilities.
But if your company is smaller -- especially if revenues are less than $10 million -- there are really only three choices, he says:
- Sell the company outright and retire on the return.
- Keep the company and hire someone to run it, taking regular dividends.
- Find someone to run the company and buy you out over time.
The option with the least risk is to sell outright, but for many small-business owners that is a challenge because their businesses are an extension of themselves, Richards says. Ask yourself these questions.
- How important are you? Is the business going to be a valid concept without you?
- Are there real buyers who want the business and who can afford it?
- How much would they be willing to pay for your business?
Selling the business has the least risk. Keeping the business and hiring someone else to run it is often the riskiest approach. Richards advises business owners to start thinking about these issues and know how they would answer the question, "What would it take to buy you out?" years before selling out is an option they would ever consider.
"If you haven't really thought out the options and someone offers you $X million for your business and you haven't done the analytics, then you are playing catch-up. There's a fuse on that."
It is much smarter, he says, to have considered the options and know what other buyers think your business is worth or how much you could make off the business if you hired someone else to run it.
Then you can say quickly and confidently, "If I can make $500,000 a year off this business, why would I sell it for $5 million?" Richards says, speaking theoretically.
Plus, knowing the business succession approach you hope to take allows you to plan other aspects of your retirement years more effectively -- even if your plan includes working at your business until you can no longer do it.