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Indeed, according to the U.S. Small Business Administration,
small business owners employ half of all private sector employees,
pay 44 percent of total U.S. private payroll, and have generated 65
percent of net new jobs over the past 17 years.
The challenge before American small business owners is keeping
their companies financially healthy long-term. This is so that small
business owners do not over-rely on the sale of their business alone
to take care of them in retirement, and so the business will
continue to remain a viable employer in the communities it serves.
Because small business owners and entrepreneurs are busy every
day working to keep their businesses running strong, their schedule
can often interfere with planning for the future. But in this
economy, planning is a must in any business strategy. Without it,
business owners may be surprised to find that the ultimate sale of
their business may not leave enough for them to live on. This is
because the sale timing might be off, or their finances are not
strong enough to cover a full retirement.
"Setting a target number -- or dollar figure of what is needed to
live on for the rest of your life -- is important, and it should be
determined at least 10 years before you're ready to retire," says
Tara Reynolds, corporate vice president with Massachusetts Mutual
Life Insurance Company (MassMutual). "And as you approach
retirement, it's also a good idea to re-calculate what the business
is worth with a proper business valuation to determine how you will
need to fund your non-working years, if the value has changed.
Having this plan and expectation in place can help you determine the
best way and time to retire from your business."
The average business owner expects to retire at age 68, according
to a survey conducted by GfK Custom Research North American for
MassMutual in 2011. Yet only one-third of the respondents had a
sound retirement strategy to ensure income for life, having access
to income when needed, managing potential health care expenses and
leaving a legacy to the next generation.
MassMutual financial professional Katheigh Degen of Kansas City
offers the following tips to help small business owners stay
financially secure during the run up to retirement.
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Anticipate needs
-- Traditionally, most people need about 70 percent of their
current annual income to live comfortably in retirement. Know
what your business is worth -- both as one entity, and also
broken down into smaller parts. Only about 10 percent of
business sales involve the entire business as one lump sum.
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Save on the side
-- You've probably heard about diversifying your portfolio, and
the same is true with diversifying your retirement plan. Put
aside 20 to 25 percent of your gross income in savings outside
of the business. This provides you with flexibility as you plan
your exit from the business. For example, if you have an heir or
employee interested in purchasing the company, they might not be
able to afford it all at once, but could take over the helm with
smaller payments over a period of time. Having additional
savings can help you tide over in retirement while you also
receive payments for the business.
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Explore options --
As you near retirement, selling off your business in one setting
would make everything easy. But as mentioned earlier, it doesn't
always work that way. Knowing your business' value can help you
evaluate offers that come your way, so you can make an educated
decision on whether to sell and live comfortably in retirement,
or keep working and pursue a better offer.
Don't wait too long to find a buyer -- Within three to five years
of retirement, business owners should start to find a buyer for the
business. Of course, this plan demands that the owner set an
expected retirement date and stick to it. By waiting too long,
owners may begin to experience poor health and low energy, which
could affect productivity and potentially the profitability of the
company.
Planning for retirement is so crucial, and owning a business can
often add complications in timing the retirement perfectly.
"Business owners put so much hard work into building the business
and making it strong and viable in the market," says Degen. "With
additional planning in retirement strategy, a good business owner
can retire and see the business continue to succeed even after it
has been transitioned over to new owners."
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