If you’re a small business owner contemplating retirement, you’re likely wondering whether your business will provide enough funds for you to comfortably live out your retirement years.
Unfortunately, the answer is complicated.
One of the most popular ways business owners fund their retirements is to sell their businesses. Depending on how profitable and attractive your business is to a buyer, the sale of your business can provide a nice nest egg for your future.
However, there are a lot of factors that play into whether you will have enough for retirement, including how well you prepare your business for sale and the current market.
Below, we’ll explore some of the different areas you’ll need to consider if you’re closing in on your working years and the role your small business will play in funding retirement.
What Does The Market Look Like?
The marketplace is more sophisticated than ever. Potential buyers are more skeptical, and determining when and how to transition your business is more complicated than ever.
Not to mention, with 10,000 baby boomers turning 65 every day over the next decade, there likely will be more businesses for sale than potential buyers.
While the state of the economy certainly plays a role in how much your small business is worth, so does how many businesses you're competing against within that market.
Business owners hoping to cash out with a lump sum that meets their expected retirement costs should know:
- There are approximately 29 million small businesses in the United States.
- Recent studies show that 66% of the current American business market is owned by Baby Boomers who plan to transition ownership in the next 10 years.
- Yet, according to the Exit Planning Institute, only 20 to 30% of businesses that go to market actually sell. That leaves 80% without a solid option to harvest their wealth.
- In the first half of 2019, 4,948 businesses were sold - putting the year on pace to become the second most active business-for-sale market since 2007.
Although the competition is high among small business owners looking to sale, there’s a piece of good news coming out of these reported sales.
Businesses sold in the second quarter of 2019 closed for a record-high median sale price of $270,000. That’s a 13% jump from the same time last year.
Is That Enough?
A recent Business Insider article outlined the lump sum an investor would need the day of retirement to live on an annual income of $100,000 per year, or $65,000 after investment income taxes are taken out.
If you sell your business and retire at the age of 65, you would need a starting balance of nearly $2.5 million to live off this amount, assuming you live well into your 80s - which isn’t out of the realm of possibilities. The Society of Actuaries estimates that for a married 65-year-old couple, there is a 45% chance one person will reach 90, and a 20% chance one will reach 95.
However, a recent survey of 400 small business owners found 75% of respondents age 18 to 64 had saved less than $100,000 for retirement. The news was slightly better for those closing in on retirement - 39% of respondents age 45 to 64 had a traditional Individual Retirement account or Roth IRAs as a source of income for retirement, and 29% had a 401 k plans.
Looking at the math, selling your business for $270,000 falls well short of the nearly $2.5 million needed for a comfortable retirement at age 65. Those who have additional sources of income find themselves in a better financial situation. Those who do not may want to start re-evaluating their retirement plans.
What Other Factors Should I Consider?
For many small business owners, they think of their business as their retirement plan. This can be dangerous, especially considering there are so many unpredictable factors that can impact the investment you have made for your golden years.
Some areas you’ll want to consider factoring into how much you need for retirement include:
- Medical costs: EBRI estimates that a 65-year-old man needs $79,000 in savings and a 65-year-old woman needs $104,000 in savings to have a 50% chance of funding health care expenses not covered by Medicare. This includes premiums and median prescription drug expenses.
- Inflation: Over 30 years, expect inflation to cut your spending power in half. You would need nearly $12,000 today to match the spending power of $5,000 in 1982.
- Child support: You may think now that you’re retired, the costs associated with raising children are long gone. While you’re under no obligation to consider this a line item in your budget, it’s important to point out that according to a recent Merrill Lynch study, nearly 79% of retirees provide some financial support to their adult children.
You’ll also want to stay up-to-date, especially as you get closer to retirement, on how taxes factor into determining your take-home withdrawals from accounts you possess, as well as on the sale of your business. Like any transaction that nets you money, you’re required by law to pay taxes on it.
How Do I Prepare My Business For Sale?
If you plan on using the sale of your business to help fund your retirement plans, it’s critical to take the appropriate steps to increase your odds of a successful sale.
The years leading up to the eventual sale or transition of a business should be a period of intense focus on business development and preparing the business for sale.
Unfortunately, many business owners choose this time to scale back for a variety of reasons, primarily fatigue from the daily battles of running their business or the mentality that the new owner “will figure it out.” If you do this, you will harm your business valuation.
Business valuation matters most at the time you are trying to sell your business. You want to make your operation as attractive as possible. Potential buyers will be most interested in revenue streams, operations and business sustainability through the transition to a new owner.
In order to set your business up to receive the best possible price, you should concentrate on:
- Getting your business in order
- Preparing a growth plan
- Tackling your operations to increase efficiency
- Getting control of your finances
- Improving your sales
- Evaluating your long-term needs
- Learning valuations in similar industries
- Researching the right buyer
- Preparing your team
Do this right and you will get top dollar for your business. Do it the wrong way you will sell your life’s work for pennies on the dollar, or worse, simply fold up your tent and go home with little show for your hard work - and for your retirement account.
You can read more about each of the areas outlined above in our article, How To Prepare Your Business For Sale And Get Top Dollar.
Preparation Is Key
For business owners contemplating retirement, one of the most daunting challenges you will undertake is preparing your business for sale and factoring that into how much you need to live the rest of your golden years comfortably.
With the right preparation that gets you top dollar for your business and a focus on realistic figures tailored to your financial situation, you can better prepare for when you determine it’s time to enter a new chapter in your life.
Bill is the CEO and Founder of InTouch Marketing. Bill drives the vision and direction of InTouch except when England's playing in a soccer tournament, because everything stops!