Using your business as a bridge to retirement

It’s not at all unusual for small business owners to consider the business as a major element of their retirement plan. Sell the business for a substantial sum and add that to the financial foundation that will support your retirement lifestyle. Or, transition the business to a younger family member or friend and accomplish the same thing.

In theory, your business as your retirement plan is a sound enough concept. In practice, it does not always succeed as envisioned. Lack of basic succession planning or realistic business valuation is often at the root of failure. If you’re planning on the value of your business to fund a 20- or 30-year retirement, plan ahead. Well ahead. You can’t control the overall economy, but there is much you can do to ensure your business attains maximum value.

Succession Planning

What specific steps will be to your advantage in establishing the groundwork for your business’ ‘nest egg’ role depends to an extent on whether you intend to have a family member or trusted friend succeed you or sell the business out right to the highest bidder.

If you believe you have built a multi-generational business to transition within the family, it is essential to plan for your own succession by establishing a succession plan. In fact, every business person should have such a plan without waiting for retirement to be visible on the horizon, just in case something unexpected should occur.

There are some basic ideas to consider in establishing such a plan:

• Does a family member want to take over the business and is he/she capable of doing so? Without that, you really don’t have a workable succession plan.
• Choose your successor wisely. The most eager family member may not exhibit the professionalism or business acumen to succeed.
• If your choice is someone other than an immediate family member, be prepared to help smooth the transition by making your motives clear to family members who might have expected your enterprise to continue as a family business.

Selling Your Business

The choice to sell your business doesn’t preclude the need for a succession plan, but it may shift your focus slightly as you approach retirement – even if you don’t intend to actually retire, but no longer want to carry full management responsibility.

Remember that an outsider interested in buying your business is not going to have the family history that will allow him or her to overlook company imperfections. Keep that in mind as you work through these steps:

• Ensure your financial records are in good order and easy to understand. Most experts suggest having financials and tax returns at least for the past three years. If you’ve ever had an issue with Canada Revenue Agency, have a straightforward explanation in mind – you don’t want a buyer to have any reason to distrust you. Keep your cash flow records clear.
• Update your business plan, including relevant industry projections and your own sales figures and projections. The buyer is looking for a successful ongoing business.
• Don’t guess the worth of your business. Unless you have a very small business, simple financials and clear business strategies, you might want to engage an expert in business valuations, someone who can impartially establish the true value of your business.

No matter what you intend to do with your business, be sure to allow yourself enough time to develop your plan in a calm, reflective way. Planning for your own succession is, for many, a difficult concept to embrace. You’ll want your plan to be the result of thoughtful consideration of all relevant aspects, not the product of a hastily concocted process in the few weeks before you retire.

The information contained herein has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. Material prepared by Raymond James for use by its financial advisors.