Which do you think is the correct answer to the following statement? More than seven out of every ten business owners age 65 or older say they have no intention of retiring because:
A) Most of their assets are tied up in the business.
B) They have no designated successor, or a designated successor does not have the financial means to buy the business.
C) They simply can’t afford to retire.
D) All the above.
Business owners love to work. Nothing beats the demanding challenge and gut-wrenching frustration of owning your own business. Its highs can be exhilarating. Its lows devastating. And both experiences can come within seconds of each other. As one business owner (that would be yours truly) is fond of saying: "There’s only one thing worse than working for yourself. That’s working for somebody else!"
Still, what about retirement? After years of chasing the bottom line, balancing income against expenses and learning the fine art of earning a profit — but not too much of one — wouldn’t it be nice to eventually settle into a life of leisure?
Actually, the majority of business owners continue to work well into their 60s, 70, even 80s. Most say they have no intention of retiring. The reasons paint an interesting, if somewhat unsettling, picture… which brings us to our pop quiz.
The correct answer is choice D… all the above.
Most older business owners do not plan to retire simply because they CAN’T! The problem is that the majority of their assets are tied up in the business, yet they have no viable market for selling the company when they are ready to retire. Plus, if they have a designated successor (and most do not), that person does not have the financial means to buy the business. The bottom line: They cannot afford to retire.
The great irony: Many of the very businesses that provided their owners with both personal and financial independence have become traps that enslave them, making it impossible for them to retire. They have invested their lives in building their companies and now have no other sources of income.
Recommendation: Make sure you have an exit strategy and positive choices available to you when you’re ready to retire. Start planning today…even if the last thing on your mind now is retirement. It can take years to get a workable plan in place.
The key is money. Ideally, you will be able to transfer the business to a family member, loyal employee or an interested outsider at retirement for either a lump sum or an ongoing income stream. However, in many cases, especially in small businesses, the owner is the business. There’s nothing to sell. If this is your situation, you must then find an alternate source of income when you stop working.
The best choice depends on your situation. Here are several options:
- Find out about the advantages of buy-sell agreements. If you have a potential successor — either a family member of other employee — begin talking about a possible transfer arrangement at a designated date. You may not want to lock in your plans today, but at least get the dialogue started. When you are ready to commit, however, one of the best ways to guarantee that everything works out as planned is to draft a legally binding buy-sell agreement. The buy-sell agreement designates who buys, when and for how much. It should also include a funding mechanism — cash value life insurance and/or a sinking fund. The buy-sell agreement designates who buys, when and for how much. It should also include a funding mechanism — cash value life insurance and/or a sinking fund.
- Determine the market value of the business on the open market if you have no heir apparent on hand. Do a business valuation to determine its worth. You may also want to talk to a business broker to assess your company’s marketability.
- Don’t rule out simply shutting down your operation. In many situations, this can be the easiest choice, since it allows you to focus on developing an alternate source of income.
- Establish a retirement plan, whether it be a SEP (Simplified Employee Pension), a SIMPLE Plans or some other qualified option. Do this regardless of your other plans, since it can provide retirement security even if something goes wrong with a buy-sell or other option.
Reminder: You have to get it right the first time. Age 65 or 70 is not the time to find out that your plans are not going to work. So, start making plans today to help assure that you will be able to retire when you are ready to do so…and you won’t be forced to work during what should be your Golden Years.
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