The Retirement Dilemma of the Small Business Owner

    Compliments of: Scott Petersen, Tax & Financial Group


    After pouring a lifetime of sweat, time and capital into building their business, many small business owners plan to make a large profit from the sale of their business and then sit back and enjoy a financially secure retirement. While this is ideal, many small business owners are so sure this will happen that they don’t bother to make any other retirement plans. They put all their retirement eggs into one basket.

    When the time comes, how do you know that someone – at just the right moment – is going to show up with cash in hand to buy your company and pay you a fair price? For thousands of small business owners each year, no one steps forward. Perhaps the business is too specialized. Perhaps its success is tied too closely to the owner’s unique personality and skills. Or perhaps possible buyers see the sale of the business at the owner’s retirement as a distress sale – and an opportunity to acquire your business on the cheap. Whatever the reason, many owners find that their company – once the golden goose that helped them provide a quality standard of living for their family – has suddenly become a white elephant that nobody wants.

    The bottom line: They can’t find a buyer; they can’t afford to retire. They’re stuck.

    One possible solution is to groom your own replacement – someone who will buy your company when you’re ready to retire. Maybe this person is a current co-owner. Or your replacement could be a son or daughter active in the business, or as a younger key employee.

    Business owners who successfully groom their successors leave nothing to chance. They realize that there is no room for error at the point of retirement. Other “best practices” include the following:

    1. They are cautious. The make sure their heir apparent is the right person in terms of temperament, personality, competence and personal goals. In most cases in which grooming a successor has been successful, the choice was obvious from the start.
    2. They fashion golden handcuffs and incentives to ensure that their replacement has reason to stay until the baton is passed. A truly ambitious successor needs and deserves gradually increasing authority and benefits. Options include deferred compensation or the opportunity to acquire partial ownership prior to your retirement.
    3. They put it in writing, locking in who does and gets what, while spelling out all details and caveats, including how to establish the final valuation of the business. This formal buy/sell agreement protects everybody.
    4. They build in a funding mechanism. This is crucial. No matter how good the terms of the buy/sell agreement, it will be worthless if the money is not there when needed to carry out the transition. Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money.
    5. They have a back-up plan. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled or – all too common – leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, it’s simply best to dismantle the business.

    Whether or not you have a possible successor for your company, you should begin mapping out your retirement strategy today. If you’d like assistance with the details – from helping establish your objectives to reviewing the pros and cons of various options – contact me to se up a good time to visit.

    For additional information or to get our Complimentary Exit Planning Report of Closely Held Business Owners contact Scott today at 949-223-8262 or

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