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Small-Business Owners: Are You Planning Smartly for Business Continuity When you Retire?

Published on December 8, 2015

Business Ownership

Owning your own business is filled with rewards—and its share of stress and worries. For those who are running profitable businesses, there are as many things to consider in order to ensure a smooth hand-off of the business when it’s time to retire.

However, a study by MassMutual reveals that almost 40 percent of business owners don’t have a retirement income strategy, assuming that proceeds from selling their business will feather their retirement nests. This might not be the case, so small-business owners are wise to do some planning in advance.

Before you sit back and relax in your retirement years, here are some steps to take while you’re in business owner mode to protect you and your heirs.

Have your business appraised

Valuation is an important first step in determining what you might get for your company when you sell it. Hire an expert appraiser to ascertain what your business is worth; this information will also be important for you and your financial adviser(s) for estate and succession planning. Some online tools, such as the one from BizEquity, can give you an approximation as a planning starting point.

Plan for your business’ future after you leave

Unfortunately, retirement isn’t the only thing that can cause a change in business ownership; disability or death may also intervene. Planning for these scenarios is vital to the long-term health of the company you’ve worked so hard to build up. Who will step into leadership roles? How will that look? Two ways to do this are with buy-sell agreements and succession plans.

Buy-sell agreement

The MassMutual study showed that only 44 percent of business owners have buy-sell agreements that lay out contingency plans for retirement, disability, divorce, death, or personal bankruptcy (the issues that would cause business disruption for a small business). This legally binding contract is among company owners or between the owners and the company, and ensures business continuity if ownership changes. Buy-sell agreements can also be used for estate tax planning so be sure to consult your financial advisers about this important tool.

Having adequate insurance is also important to protect heirs during a buyout. The MassMutual Survey also found that only 52 percent of existing buy-sell agreements are funded with life insurance and only 5 percent are funded for a disability buyout.

Succession plan

This is all about transitioning ownership of the company (to your heirs or other internal stakeholders) during your lifetime or in the event of your death. It’s as much a human resource issue as it is a long-term financial strategy. Upon your death, your succession plan will make it easier for your family when your ownership intentions are clearly spelled out.

Build a robust retirement nest egg through self-direction

If you’re not only savvy about your area of enterprise but savvy about alternative asset investing as well, a self-directed SEP IRA can be a great way for you (and your employees) to build up retirement capital. All types of retirement plans may be self-directed (Traditional and Roth IRAs and even HSAs may be self-directed); you may also choose to offer a self-directed SIMPLE IRA to your employees, depending on your business goals.

These self-directed accounts allow individuals to include a broad array of nontraditional investments, such as real estate, precious metals, hedge funds, commodities and so much more—assets they already know and understand, and might be investing in outside of an existing IRA.

As part of your long-term business planning, you recommend you consult your tax or other financial adviser about setting up these retirement plans and determining if they’re right for you. At Next Generation Trust Services, we’re available to answer questions about the types of investments that may be included and help you get set up with ease. We have plenty of online tools available on our website, including a SEP IRA starter kit.