Financial professionals, for the most part, focus on advising individuals or couples, helping them plan for retirement by suggesting strategies for getting the most out of their money, such as reducing taxes or creating income streams.
Sometimes those individuals also happen to be business owners – and when a business is a person’s greatest financial asset, things can get more complicated as extra factors come into play on the way to retirement.
In other words, it’s a different conversation, but one that absolutely needs to happen.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you’re a business owner still a few years out from retirement, now is the time to begin taking steps that will maximize your business’ value and put you in the best position to retire comfortably and confidently. Let’s take a look at what those steps should include.
Determine what the business is worth
Surprisingly, the question of how much a business is worth is something many owners spend little time thinking about. That’s probably because they focus so much of their time on revenue, expenses, profits and other concerns that relate to day-to-day operations. Selling the company is, presumably, far off into the future. They have more immediate worries.
The value of the business is a question worth answering. When owners come to me, one of the first things we do is recommend a preliminary valuation of the business, which shows they have built something of substantial wealth. Usually, for the business owners I see, the value of their company is $1 million or more, which comes as a pleasant surprise to many of them.
Once they understand that value, they should take steps to preserve and even increase the amount.
Create a financial plan
In many cases, business owners initially visit me because they want assistance creating a personal financial plan for their retirement. Those conversations inevitably lead to discussions about the business as it becomes clear it accounts for the majority of the person’s wealth. (Next in order of value are usually a 401(k) and real estate holdings.)
One question that comes up quickly involves when they want to retire. Some owners are in no hurry. They prefer to keep working longer than their employees, so retirement is off in the distance, maybe not quite yet in view. Others are eager to retire – tomorrow, if possible.
Everyone knows how important it is to have a nice-sized nest egg set aside for retirement so you don’t run out of money. For a business owner, the size of the nest egg is affected greatly by the net amount they realize after selling the company, minus taxes owed and the transaction cost.
Here is something that is probably not a surprise: Taxes are the biggest expense when selling, so that should be considered when creating the financial plan. Typically, the taxes on the sale of a business are capital gains taxes. It’s important to work with someone who can help with tax planning and reduce the amount owed as much as possible.
Fortunately, the tax code allows many ways to reduce if you are proactive and understand the rules. Most people have four choices relative to capital gains tax: Pay it (most people do this because they don’t know about their choices), defer the taxes, reduce them or avoid them.
For example, one strategy owners use is to sell the business on an installment plan. The buyer’s payments are staggered over multiple years, allowing the tax liability to be spread out rather than being due all out once. Another option is to defer and eventually avoid the capital gains tax by selling the business to employees.
Creating a financial plan also opens the door for the involvement of the business owner’s spouse. Some spouses are intimately involved with the operation of the company, while others are not. Regardless, when you are building a family retirement plan as a couple, it’s important to make sure expectations are aligned with what each person’s vision for retirement looks like.
Create an intentional growth plan
Creating an intentional growth plan for the business is critical, especially within five years of any plan to sell. You want the company to be in the best shape possible for wooing prospective buyers.
It’s much like selling a house — where you upgrade the kitchen, improve the landscaping or take other steps to make the property more attractive.
Unfortunately, too many business owners don’t plan for that sale carefully. They sell six months or so after they make the decision to do so, reducing their chances of getting the best price because they have not made the necessary upgrades or found ways to improve.
This is why the earlier you can get started on an intentional growth plan, the better. To accomplish that goal, concentrate on developing value drivers that will help you optimize the business’ worth:
- Make sure there is a consistent and increasing net free cash flow
- Develop a strong management team
- Ensure you have documented business systems and processes that all team members follow
- Demonstrate you have a diversified customer base and aren’t reliant on just a few major customers
- Upgrade the appearance of the facilities so they are consistent with the asking price
- Have a realistic growth strategy
Increasing your business’ value to position it for a successful sale does not happen overnight. Owners who make that growth a priority five years or more before they sell can put themselves in a better position to attract the price they need.
To accomplish that, it’s wise to seek help from a financial professional with experience working with business owners. Together, you can work toward the ultimate goal – a fitting swan song for your days as a business owner and a confident beginning for the next adventure in your life.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Investment advisory services offered through LifeWealth Investments, LLC d/b/a The LifeWealth Group (“LWG”). LWG is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered by duly registered individuals may be through AE Wealth Management, LLC (AEWM). LWG and AEWM are both Registered Investment Advisers. Registration as an Investment Adviser does not imply any level of skill or training.
Securities offered only by duly registered individuals through Madison Avenue Securities, LLC ("MAS"), member FINRA/SIPC. MAS and LWG are not affiliated companies. Insurance products are offered through the insurance business Significant Wealth Management, LLC d/b/a The LifeWealth Group. Significant Wealth Management is not a registered investment adviser. The insurance products offered by The LifeWealth Group are not subject to Investment Adviser requirements. The information contained in this article is general in nature and for informational purposes only.
CFP Board owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. 1681749 - 10/24
Related Content
-
Stock Market Today: Dow Dives 1,123 Points After FedMarket participants reacted predictably to a well-telegraphed hawkish turn by the Federal Reserve.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Stock Market Today: Dow Dives 1,123 Points After Fed
Market participants reacted predictably to a well-telegraphed hawkish turn by the Federal Reserve.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are Saying
Federal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Jabil Stock Pops After a Beat-And-Raise QuarterJabil stock is higher Wednesday after the electronics firm beat earnings expectations and raised its full-year outlook. Here's what you need to know.
-
UBS Global's Solita Marcelli: It's a Green Light for U.S. Stocks in 2025A strong economy, rate cuts and continued AI spending should support stocks in the new year, says UBS Global's chief investment officer, Americas.
-
Why Birkenstock Is Still a Buy After EarningsBirkenstock shares are soaring Wednesday after the sandal maker beat expectations for its fiscal fourth quarter. Here's what Wall Street has to say.
-
Most Women Surveyed Find Retirement Is Not What They Expected. How You Can PrepareLess than half of working women feel prepared for retirement and of those already retired, only 19% find retirement to be exactly what they expected. Here's what you can do while still working.
-
You've Got a Trust: Now Who Should Be the Successor Trustee?You've set up a trust to protect your assets and your beneficiaries, but you still must choose the right person to execute your wishes. Here's how to do that.
-
Three Ways Fiduciary Financial Planners Put You FirstFiduciary financial advisers are required by law to work in your best interest. Here's how they are key to intentional and efficient financial management.
