Let’s talk about Mark (not his real name). Mark has spent years building a successful logistics company, moving goods across the region, and developing relationships with local businesses. He’s been a steady presence in the community, with everyone from his employees to his clients relying on him to keep things running smoothly. Now in his early 60s, Mark is starting to think about retirement. He wants to slow down, spend more time with his family, and maybe even travel, but he’s still determining how to make it all happen financially.
Like many small business owners, Mark’s wealth is tied up in his business. While he has some savings in a 401(k) and his wife has a pension, most of their net worth is in the value of the business. This raises an important question: How can he maximize the value of his business and plan for a secure retirement? If you’re a business owner like Mark, here are some strategies to consider as you approach retirement:
Plan for Your Retirement (and Your Employees’)
As a small business owner, you’re responsible for planning your own retirement, but you may also want to help your employees prepare for theirs. Offering a retirement plan can be a valuable way to support your team while securing your future. There are options that can suit both small and larger businesses.
For smaller companies, SIMPLE IRAs and SEP IRAs provide great flexibility. A SIMPLE IRA allows employees to contribute a portion of their salary toward retirement, while employers can either match those contributions or contribute a percentage of each employee’s salary. This option also offers tax advantages to your business. A SEP IRA, meanwhile, allows for employer-only contributions, up to 25% of an employee’s income or $69,000 in 2024. Both plans are simple to set up and can offer substantial tax benefits.
For larger businesses, sponsoring a 401(k) plan can be a game-changer. A 401(k) plan allows employees to contribute a higher portion of their salary and gives you the opportunity to offer a company match. This type of plan is not only an excellent tool for building long-term wealth for your employees, but it also helps you retain and attract top talent. Offering a 401(k) plan can signal that your company is invested in the financial future of its employees, which fosters loyalty and improves morale.
Contributing to employee 401(k)s benefits your business from a tax standpoint, as those contributions are tax-deductible. Furthermore, your employees gain a structured way to save for retirement, which can increase overall job satisfaction and productivity.
Know the Value of Your Business
Understanding the value of your business is essential for retirement planning, especially if you plan to sell it to fund your retirement. A professional valuation can help you get a clear picture of what your business is worth by assessing cash flow, assets, and customer base.
Knowing your business’s value early on allows you to plan and adjust your expectations. It also ensures that when the time comes to sell, you have a clear understanding of the price you can reasonably expect to receive.
Have a Succession Plan
A clear succession plan makes your business more attractive to buyers and ensures a smooth transition when you retire. Buyers want to know that the business can run without you, so it’s important to start delegating responsibilities to key employees and creating a roadmap for the company’s future.
A formal succession plan is critical even if you plan to pass the business to a family member or key employee. It shows how the business will continue to grow and succeed once you step away, which increases its value in the eyes of potential buyers.
Diversify Your Retirement Savings
Many small business owners make the mistake of relying too heavily on the sale of their business to fund retirement. While your business might be your largest asset, it’s important to diversify your savings.
You can start building wealth outside of your business by contributing to a SEP IRA, SIMPLE IRA, or Solo 401(k). This gives you more flexibility and security when the time comes to retire. In 2024, for example, you can contribute up to $69,000 to a SEP IRA, allowing you to save more while reducing your reliance on your business for retirement income.
Manage Debt and Cash Flow
A business with excessive debt or too much cash on hand can raise concerns for potential buyers. Reducing debt and managing cash flow effectively will make your business more appealing when it comes time to sell.
Buyers prefer businesses with clean balance sheets and well-managed working capital. Address any outstanding debts and optimize your cash flow so your business looks as strong and profitable as possible when you begin negotiations.
Develop an Exit Strategy
An exit strategy is key to retiring successfully as a small business owner. Though thinking about leaving the business you’ve spent years building might feel strange, the earlier you start planning, the better.
Consider how your business will run without you. Start delegating responsibilities, training key employees, and creating systems that allow the company to function independently of your day-to-day involvement. This can make the business more attractive to buyers and help you step away confidently when the time comes.
Additionally, market conditions will play a role in when you sell. Building flexibility into your retirement plan gives you the option to sell when market conditions are favorable or continue working if a recession hits.
At Rothschild Wealth, we understand the unique challenges that small business owners face when planning for retirement. We’re here to help you navigate those challenges, develop strategies tailored to your needs, and secure your financial future. Whether it’s through selling your business or building a diversified retirement plan, we can help you create a plan that works for you.
