Sell Your Business to Fund Retirement

EDITOR'S NOTE: This article was originally published in the July 2011 issue of Kiplinger's Retirement Report. To subscribe, click here.

When you're playing the starring role in your own small business, it can be hard to imagine how the show will go on without you. But aging small-business owners have a lot of good reasons to start planning today for a graceful exit. That means considering what it might take to sell your business and what price you need to get to fund a secure retirement.

If you're like many older entrepreneurs, you may be behind in readying your business for sale. Although 53% of baby-boomer owners intend to exit their businesses in the next decade, nearly 90% of them don't have a written plan to achieve that goal, according to a 2008 survey by White Horse Advisors, a financial advisory firm in Atlanta. Given that many of these business owners have most of their net worth tied up in their firms, the lack of a formal exit plan "creates a pretty dire outlook for retirement for entrepreneurs," says Richard Jackim, managing director at New York City–based mergers and acquisitions firm MidCap Advisors.

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There are several reasons to plan for the sale of your business well before your desired retirement date. It can take anywhere from several months to several years to complete a sale, and many buyers will want the seller to stick around for a year or more to smooth the transition. "You don't just hit a certain age and say, 'Now I'm going to sell,' " says Tom Deans, who in recent years helped sell a plastics manufacturing business founded by his father and is now a Toronto-based public speaker on business-succession planning.

Although he and his father decided to sell the business in 2002, Deans says, the sale didn't happen until early 2007. It took another four years to receive the full proceeds of the sale.

The ever-evolving tax code is another reason to start your planning early. Today's long-term capital-gains tax rate of 15% is scheduled to rise to 20% in 2013. And as a result of last year's health-care reform law, higher earners in 2013 may face an additional 3.8% tax on capital gains.

Preparing Your Firm for the Sales Block

The first step small-business owners can take toward a smooth transition to retirement is to run the numbers. Advisers at Bernstein Global Wealth Management suggest that small-business owners think about their "core capital" requirements, or the amount they need to take out of their business to be highly confident of covering lifetime spending needs, adjusted for inflation. That amount depends on the client's age, spending rate and portfolio risk level. For example, a 65-year-old couple with a portfolio of 60% stocks and 40% bonds will need $3.2 million if they plan to spend $100,000 annually in retirement, according to Bernstein's calculations.

The amount you need for retirement, of course, may be nowhere near the amount your business can bring in a sale. Low-cost online tools, such as the Valuation Report from BizBuySell.com, can be a starting point for determining how much your business is worth. But many advisers also suggest that you get a professional valuation from a qualified appraiser. You can search for a business-valuation expert accredited by the American Society of Appraisers at www.asabv.org.

Once you know your retirement needs and the worth of your business, you may have more options than you imagined. If it appears that a sale would bring more than enough to cover retirement needs, for example, you might consider giving some shares of the business to family members.

This is a great time to consider such a gift, advisers say. Individuals can currently give away up to $5 million over a lifetime (above the annual $13,000 exclusion) without triggering gift taxes, up from $1 million last year. And when you're giving away shares of a small business, you can often value them at a discount, effectively boosting the amount you transfer tax-free, says Brian Wodar, director of wealth management research at Bernstein. Such discounts may be justified, for example, when the shares don't represent a controlling interest in the business and are difficult to trade.

If it appears that the sale won't bring you the amount you need for retirement, consider the best ways to boost the business's value. If your business is really all about you -- say, a consulting business built on your expertise -- it may have little value to a potential buyer, and you might simply aim to maximize profits for a few years and save as much as you can before shutting it down, says MidCap Advisors' Jackim.

In other cases, you can focus on boosting the parts of the business that can easily carry over to a new owner, says Patrick Ungashick, chief executive officer of White Horse Advisors. That can mean diversifying your customer base and building a quality management team so that the business doesn't depend on you.

That approach worked for Barbara Miller, 56, of Highland Park, Ill. Miller says she "was very hands on, involved in every decision" at Allied Health Professionals, the business she started 25 years ago. So as she was trying to sell the business over the past couple years, she tried to ensure that it could operate without her. She hired a couple of new employees to do back-office work and recruiting for the business, which provides therapists on a contract basis to hospitals and rehabilitation centers. She sold the business last year.

Because selling a business can be time-consuming, consider working with a business broker or a mergers and acquisitions adviser. A business broker can be a good choice if your business is worth $2 million or less. These brokers charge commissions of about 6% to 12% of the sale price. Look for brokers who are accredited by the International Business Brokers Association (www.ibba.org), and ask for references from clients and buyers that the broker has worked with in the past.

For larger businesses, an M&A adviser will take a more customized approach, marketing the business to targeted buyers, such as hedge funds and private equity firms. In addition to requesting references, ask for details on deals the adviser has completed in your industry and the types of buyers involved. These advisers often charge commissions that decrease with the size of the transaction, say 5% on the first $1 million, declining to 1% on $20 million.

And don't overlook the professional help you can get free. SCORE, a nonprofit group focused on educating entrepreneurs, has a network of experienced business people who volunteer as mentors. You can search for a mentor with expertise in exit planning at www.score.org.