Saturday, July 2, 2022
Cash FlowHow to Prepare to Retire from your Small Business

How to Prepare to Retire from your Small Business

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It is inevitable that at some point in the future it will be time to step away from your business. Only you will really know when the time is right, based upon your financial and physical health, as well as the health of the business. Similar to most people who work in corporate America, the typical entrepreneur doesn’t spend a lot of time thinking about the financial aspect of retirement. If you are like many small businesses, you attempt to keep growing your business by reinvesting profits into items that will continue to drive sales. Savings is something that most do not do. According to a survey by Manta, one-third of business owners don’t have any retirement plan, and 75% of respondents to a BMO Wealth survey said they had “$100,000 or less” saved for retirement.

The mindset of many is that they will grow their businesses until the time is right, and then exit by selling the company. Usually during this growth little is taken out as salary for the owners. In a sense, this strategy is really putting all your eggs in one basket. Just because the time becomes right when you want to sell, doesn’t mean the stars will align for you. That’s a risky strategy that doesn’t account for economic recessions, emergencies, and unexpected downturns that can significantly impact your selling price and thus your retirement package. Let’s take a look at some steps you can take now to help you retire when the time is right.

  • Professional Financial Advice: The vast majority of you will not be working in the financial sector and thus not have expertise in retirement planning. Look to hire a certified financial planner (CFP). The right CFP can help you plan for your future in a way that also works for you now.
  • Create a Retirement Account: While your CFP or accountant can help you set this up, it is a pretty straight-forward concept. As with most things financial, you should at least familiarize yourself with the basics of a retirement account so you have an idea of what’s going on. There are three small business retirement plans in particular that are helpful to small business owners with fewer than 100 employees. It is also possible to add your employees to the plan, thus giving you another selling point in the hiring process during this tight labor market.
    • Self-Employed 401(k): These plans only cover the business owner and spouse, so it is perfect for the solopreneur. Solo 401(k)s are advantageous because they offer generous contribution limits, with total contributions up to $55,000 (as of 2018) and immediate vesting. There are no setup or maintenance fees.
    • SEP IRA: This can be used by business owners and employees. Participants can contribute either $55,000 or 25% of their annual compensation for 2018 (whichever is less). In order to use this plan, you must also make contributions to any employees’ accounts whenever you make one to your own account.
    • Simple IRA: This is a good starter retirement plan for small owners to offer employees. Simple IRAs allow participants to contribute $12,500 a year and employers must match contributions dollar-for-dollar up to 3% of their salary for at least two years in a five year period.
  • Develop an Exit Strategy: This is often overlooked, but is one of the most fundamental concepts for a successful entrepreneur. As hard as it may seem, your goal as a business owner should be to build your venture to the point that it can operate without you. Plan your exit strategy for your business now, rather than right before you want to sell so you can maximize your gains. You have earned it!

 

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