Selling a Business – Retirement Planning Considerations
Before you pull the trigger on selling a business, there are some personal retirement planning considerations. What will you do with the proceeds? How will the sale of the business impact your retirement plan? Most business owners have a significant portion of their net worth tied up in their business, so selling it can have a dramatic impact on your personal retirement plan. You want to make sure you are getting the maximum value when you sell!
Before we discuss the retirement planning aspects, let’s look at what you can do to maximize your business’ value. At a recent seminar (video link here), Curtis Kuttnauer, Senior Partner at Golden Circle Advisors, discussed a very detailed process that every business owner needs to be aware of. Some key takeaways from this seminar included:
- Most owners sell and then retire with the proceeds being a large portion of their retirement plan
- An average of 50-75% of a business owner’s net worth is tied up in their business
- Adequately prepare for the sale of the business
- Get a professional valuation of the business
- Estimate your exit costs and tax liability
- Only 9% of business owners have a written plan
- Build a team of professionals to help you prepare, execute the sale, and prepare for retirement
- Ex: Specialized CPA, attorney, financial planner
With such a large portion of your net worth tied up in your business, it is critical to maximizing its’ value before you sell. Take the steps needed to prepare for the sale. Get a professional valuation. Fully understand the costs and tax liability. Just like in Financial Planning, selling your business will yield much better results if you are following a written plan. Do not try to wing it, even if you are selling to family or current employees. Listen to the whole seminar for excellent tips on the entire process, including the pros and cons of selling to family, employees, or third parties.
Celebrate the big day when you close on the sale of your business! Now that you have received the maximum value for your business and you have agreed on payment terms, it is time to put the money to work in your retirement plan. Your plan should have goals and a strategy on how to achieve those goals. With your new source of money, you may be able to expand your current goals or add new ones. It’s a good time to reassess any plans that you currently have in place.
Retirement Planning as part of the Process
Engage your Financial Planner throughout the process of selling a business. A Financial Planner specializing in retirement planning can help you analyze the impact of taking a deal in all cash, note, or some other deferred payment plan. He or she can run the various scenarios to provide you with cash flow projections and probability of success in maintaining a lifestyle throughout your retirement horizon, generally up to 95 years of age.
The objective is to give you the potential impact on your personal retirement plan, throughout all the years of your retirement. Will you run out of money? If so, when? What other strategies or investment options can help mitigate that risk? Are you optimizing your social security options? Do you know when and how to apply for Medicare? What is your risk tolerance for the best investment strategy? These questions are pertinent to your retirement planning.
A written retirement plan is as important as the written plan for executing the sale of your business. A written plan can help you strategically allocate your new financial resources in a graphical form and cash flow tables. If you have other investments such as an IRA or taxable accounts, the plan can take all of those into consideration to give you a complete picture.
Don’t forget that you need to live month-to-month meeting your essential expenses. Will this be covered by Social Security and other income sources such as rental income, bond ladders, CD ladders, or other means? Or will you need to tap into some of your other invested funds? It is well worth the time to take a deep dive into your expense requirements to make sure you have the necessary income to live the lifestyle you want and can afford.
Hopefully, selling a business will provide some investable cash that can be added to your current investment mix. Now is a good time to review your risk tolerance, current asset mix, expense fees, and investment projections. Remember that if you have a 30-year retirement, then at least part of your portfolio should be invested with a 30-year horizon. This will be important as many people face long-term care issues near the end of their retirement horizon.
Tax Considerations in Retirement
The Tax Cut and Jobs Act of 2017 provides tax breaks to most Americans until it sunsets in 2025. Now is a good opportunity to evaluate your withdrawal strategy to ensure it is as tax efficient as possible. Also, perform some calculations to determine if any Roth Conversions would help maximize your tax-free assets by end of retirement. Your tax considerations in retirement can make a very large difference in your ending portfolio – important for you and for wealth transfer considerations.
Although your Financial Planner may not be an Estate Planning attorney, there are still some aspects of estate planning that should be analyzed within your retirement plan. Documents such as Power of Attorney, Medical Power of Attorney (Patient Advocate), will, trust, etc. should be in place and updated as pertinent life changes occur. If there are any changes needed, you will need to see an Estate Planning attorney for the legal creation or update of these documents.
Selling a Business: Questions to Consider
A good retirement plan should have several components:
- How will the sale of your business affect your current financial situation?
- Will you be able to meet your existing goals or new goals?
- Cash Flow Plan and Income Strategy – How will you replace the income from your business?
- Investment Plan – How will you invest the lump sum?
- Probability of Success – How will each of the scenarios impact your long-term needs such as Long-Term Care?
- Tax Planning – How will a tax-efficient withdrawal strategy and possible Roth Conversions affect your long-term plan?
- Estate Planning – How will you transfer the wealth upon your passing?
Selling a business can be very complicated, especially since the average business owner only does this once! These questions and many others should be discussed in detail with a professional team that is qualified that can help you navigate all the complexities. Your Financial Planner should be integral on this team of professionals directing the critical financial decisions for your retirement.
About Kastler Financial Planning
Our core purpose is to improve the financial life for each and every client we serve. We believe that people of all income levels should have access to affordable and professional financial planning and investment management services, without the pressure or bias of product sales and commissions. Always acting as a fiduciary, the only fee we receive is the fee paid by the client. We put your best interest before our own. No product sales, no commissions, and no account minimums.
We specialize in family planning, families with Special Needs Planning, Retirement Planning, Retirement Tax Planning, and Small Business Retirement Plan Consulting. Our services are analytical and will be appreciated by the engineering and technical-minded individuals. We also use “bubble up” reports for the not-so-technically minded.
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