5 Essential steps for business owners nearing retirement

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC, Head of Financial Planning

As a business owner, you're already accustomed to planning ahead, making strategic decisions and building something with long-term value. As retirement approaches, that same discipline can help you align your business exit with your personal financial goals.

By 2035, roughly 6 million small- and medium-sized businesses will close or be sold as owners reach retirement age.¹ Many are planning ahead for this event: A recent Citizens survey of business owners found that 50% say they expect to transfer their business in the future, and 71% have or are working on a succession plan.²

Taking a systematic approach to your impending retirement can help you feel more confident about your financial future after you leave the workforce, allowing you to make the most out of this next phase of life. Here's a step-by-step guide to ensure you're ready.

1. Get a formal business valuation

If you're planning to use your business interest as a source of income in retirement, you need to have a realistic idea of how much it's worth. In many cases, proprietors end up selling their company for less than they anticipated or have trouble finding a buyer at all.

That's why it's imperative to have an independent appraisal company conduct a formal valuation of your business, especially if you're only three to five years away from your target exit date. You'll come away with an estimated market value based on hard data rather than your own intuition.

The bottom line: You can't build a retirement income strategy around an asset that you haven't valued properly. An appraisal by a reputable firm can give you a much clearer sense of how much money you may be able to receive from the transaction.

2. Build retirement assets beyond your business

Don't plan on the eventual sale of your company as your entire retirement strategy. Even if you receive a favorable valuation from a professional appraisal team, economic factors that are out of your control, like a recession or a shift in market dynamics, can change the prospects for a sale.

That's why it's important to have other assets that provide a safety net as you leave the working world behind. It's best to think of retirement contributions or a pension as the foundation of your retirement strategy, with the potential sale of your business as an added financial cushion.

Business owners have access to a variety of retirement savings vehicles, including SEP IRAs, SIMPLE IRAs, Solo 401(k)s and other tax-advantaged plans. Whether you're establishing a retirement plan for the first time or have been contributing to one throughout your entire career, it's important to understand your retirement savings goals and what opportunities exist to accelerate savings as retirement approaches. Building these assets can help provide greater flexibility and reduce dependence on the eventual sale of your business.

3. Finalize your exit strategy and succession plan

It’s never too early to start thinking about succession planning. However, as retirement approaches, it's important to finalize your plan for how you'll transition ownership of your business and convert the value you've built into personal wealth. This could include:

• A transfer to a family member
• An internal sale to a trusted employee or management team
• An employee stock ownership plan (ESOP)
• A third-party sale to a competitor or investor

Given the inherent complexity of selling a business, you'll want to assemble an experienced team of professionals to guide you. Often, this includes a tax advisor and a financial planner with exit-planning experience who can help you determine the viability of a business sale and help you invest the proceeds.

Ultimately, your aim is for potential buyers to feel confident about the company's prospects when you're gone, so having professionally reviewed financial statements is vital. You may also want to establish employee retention agreements that incentivize your most valuable managers and salespeople to stay on board after the sale.

4. Update your estate plan

Your business may represent the primary asset that you intend to leave for your heirs. If you anticipate divesting your interest in the company within a few years, you'll need to update your estate plan accordingly.

For example, you may need to:

• Review specific bequests in your will and check the beneficiary form for each of your investment accounts to reflect the transition from business assets to financial assets.
• Reassess your life insurance needs, including any policies tied to a buy-sell agreement, and update the beneficiary designations as needed.
• Ensure that any trusts that you've created are up to date and properly funded.

Given the long-lasting tax and legal implications that are involved with the sale of a business, working with a coordinated advisory team, especially an estate attorney, CPA and financial advisor, can help ensure that your updated plan reflects your updated financial situation.

5. Coordinate your post-exit income

Many business owners retire with a mix of assets, which may include bank balances, brokerage accounts, retirement accounts and proceeds from a business sale. Coordinating how and when to draw from each retirement income source can help lower your tax liability, avoid or reduce Medicare IRMAA surcharges and support portfolio longevity.

A financial advisor can help you evaluate how the sale or transfer of your business fits into your broader retirement income strategy. They can also help you assess factors such as your expected retirement expenses, income needs, investment allocation and the timing of Social Security benefits to help support your long-term goals.

Keep in mind that you may lose your employer-sponsored health insurance as you exit your company. Medicare is available to eligible adults age 65 and older, but if you're younger than that, you'll need to find coverage elsewhere. Whether you get it from a spouse's employer plan or buy a policy on the individual market, make sure to factor this additional cost into your post-retirement budget.

Plan ahead for the retirement you deserve

When you're just a few years away from the transition, it's time to start fine-tuning your exit strategy and assess the retirement income you'll have available. Leaning on professionals with expertise in selling your business and managing your assets can help ensure that you're ready for what's next.

With access to a team of specialists, including Citizens Business Banking Relationship Managers, a Citizens Wealth Advisor can help you create a retirement plan tailored to both your business strategy and personal financial goals.

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