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When business owners retire


Proper financial planning and foresight is critical to ensuring maximum value on your largest asset once retirement comes calling

Story by Lee Marie Reinsch


Many entrepreneurs and business owners aren’t eager to retire.

That surprises their non-business-owning counterparts. “The average person is waiting for age 62 or 65, ready to walk out the door,” said Michael Scott of Independence Financial in Oshkosh. “But I can think of plenty of our business owners who are working into their 70s and even their 80s.”

One clocked in until the day he passed away at 92.

“They’re all completely financially sound and can quit whenever they want; they don’t need to be working, but it’s their whole life,” Scott said. “They created the business … it’s what they love. It’s their hobby. It is what they want to do.”

While these stoic souls might not wish to check in to the Polident palace, many wouldn’t mind a couple days off here and there, or working fewer hours.

“If you can figure out a way to take some of the stress off the business owners … now that’s appealing to them,” Scott said.

Take Scott’s dad, Walter “Scotty” Scott, a septuagenarian, for example. They have worked together for almost 15 years, and Scott’s in the process of buying Independence from his dad. Even after 51 years with Independence, Scotty’s in no rush to join the gold-watch club.

That’s OK with both of them. Scotty loves being a mentor to his son, being engaged in the community and doing meaningful work.

“He’s the quintessential scenario of a business owner – their (work) is everything about them,” Michael Scott said of his dad. “Some clients he’s known for four and five decades. They’re not just clients, they’re his friends. He doesn’t want to give up the opportunities to meet with them.”

No egg in the nest

Many small-business owners don’t get pensions, 401(k) plans or formal profit-sharing plans, and they may not even have much of a nest egg.

“Small-business owners typically don’t save money for themselves because much of their profit goes back into the business, and how do you retire on that?” said Kate Thome of Thome Benefit Solutions in Neenah.

Some do well enough to put profits back into their business and save for retirement. “But for others, (their business) is what they have. That’s their retirement,” Thome said. “You need a revenue stream or a lump sum for retirement.”

Many don’t even take a salary. Instead, they draw from the company as needed. That has an effect on their Social Security benefits, because without wages and withholdings, they’re not contributing to the system, Thome said.

Others make it work to their advantage. “With some business owners, a lot of times they make a lot more money investing in their business than they can by saving,” said Scot Madson of Navigator Planning Group in Green Bay.

Valuations: Informal and formal

One of the first things Thome asks business owners is, “What if someone came in with a checkbook and offered to buy your business? How much would you sell it for?”

Often emotions rule. Business owners may overestimate. Sometimes they underestimate. Financial advisors can help owners get an objective estimate, based on similar companies within the same industry, for an informal valuation.

Lending institutions do formal valuations, which may cost several thousand dollars. The institution will ask for information including three years’ worth of profit and loss statements and balance sheets.

“Have your paperwork as clean as possible” for a prospective buyer,” Thome said. “This will position you for a better result from the buyer.”

Everyone is different

Sales of small businesses usually fall into three fairly self-explanatory categories: internal, external and family sales. They can take weeks or years, and each is as different as the people who are retiring.

The role Scotty plays at Independence illustrates one kind of retirement – the gradual one. There’s no gold watch, no ‘Congratulations, Old Fart’ banners, no office roast. The exiting business owner might stay on as the new one learns the ropes.

The exiting owner may even become an employee or consultant. They might draw up an employment agreement that the former owner will stay on board for a few years and be paid a portion of the revenue.

In exchange, the newbie gets firsthand training, and longtime customers who are accustomed to dealing with the former owner get a more gradual exposure to the new one owner, thus aiding in client retention.

“Many times the relationship of the old owner is also purchased, because their connections and the name of the old owner have value to customers, who might just say ‘I don’t know (this new person),” Thome said.

Sometimes, it’s better not to linger. If the business is sold outright, the new owner or management may not want the old owner sticking around.

“They’re going to want a quicker transition, and you want to be able to walk out that door and let them run it their way, because sometimes to do things the way you’ve always done them might not fit with the new person,” Madson said. “That can create some conflict.”

‘For sale’ sign

So here’s a no-brainer: You’re selling your business, you probably don’t want to take the lowest bid.

So are there any ways to pump up the value of your business? Fresh paint, new welcome mat, Febreze?

“In addition to enhancing the customer experience coming in the front door, you can enhance the financial experience by finding profitability, of which there are two main drivers,” says Bob Mathers, a business attorney and accountant with the law firm Davis & Kuelthau in Oshkosh. They are: Earnings or cash flow, and the stream of benefits a buyer is expecting to get into perpetuity.

If there’s a customer concentration issue – one customer accounts for too much of your revenue, rendering you feeling insecure should they take their business elsewhere – you might eliminate as much risk in the transaction as you can.

People are willing to take risks if they believe the payoff could be worthwhile. Business owners can reduce the amount of risk for potential buyers by making things like expenses and income as stable as they can, by instituting long-term contracts with customers and creditors, such as professional service providers, so the buyer knows income will be steady, Mathers said.

How the stock market is doing can even affect business sales.

“A closely held business, for example, is a more risky investment than one in the public equity markets,” Mathers said. “This differential in risk can be material. Therefore, the investment in a closely-held business needs to have a materially higher reward to compensate the buyer for that additional risk.”

Insure for security

Scott advises getting an accountant involved to figure out what the tax impact will be for both buyer and seller.

“If a business owner is selling over 10 years in installment payments (without a large down payment) there’s a significant amount of risk that the seller has, to make sure the buyer is going to be successful and that the payments are going to continue to be maintained,” Scott said.

He suggests that the seller purchase life insurance on the buyer.

“If three years into the process, the buyer drops dead, then the seller is (thinking) ‘There’s 7 years of payments I’m not getting.”

Don’t pretend you know everything

Don’t be afraid to hire outside help, Scott said. Say a family member is taking over the business but has little to no experience in running a company.

“In those types of cases, we encourage them not to rule out bringing in outside management,” Scott said. “Oftentimes, people seem to skip that role, thinking that if you own the business, you are supposed to run every aspect of it, and that’s not necessarily the case.”

What’s it worth?

How much a closely held small business is worth depends on who you are and why you want to know. “People laugh at that, but it’s really the truth,” Mathers said.

The IRS, for example, uses what’s known as a hypothetical buyer and seller in valuing a business for estate-tax or gift-tax purposes.

“That number is lower than it would be if I were buying a business to take out a competitor,” Mathers said. “When we have family involved, sometimes we’ll use gifting transactions instead of sale transactions, and instead of optimizing the value of the business, sometimes we need to do things that will bring that hypothetical value down.”

Minority-interest discounts and discounts for lack of marketability can lower that hypothetical value.

“It’s an entirely different discussion than we would have with the client who just wants to pull out the cash and lie on the beach,” Mathers said.

With families, succession plans can take a number of forms, including the gradual transfer of shares in the company, a series of gifts or the establishing of separate estates.

A strategy called “opportunity shifting” can be useful, too. “Say I am an orthodontist and my daughter just got done with orthodontia school and we want to bring her into the practice. It’s too much money for her to buy, so what I might do is set up a separate company (for her), and the next patient who walks in signs the contract with her company instead of mine,” Mathers said. “I just opportunity-shifted that revenue stream to the daughter’s hands.”

Biggest no-no

Retirement planning should start the first day on the job, said Thome.

“They should have an exit strategy in mind as soon as they’re in business.”

Thome meets with people who want to sell their business ‘next year,’ and that doesn’t often happen, she said. A proper sale takes time and may not necessarily be what the owner envisioned – one that’s quick, uncomplicated and super-profitable.

“Even if it’s a family member working in the business, you transfer some share value over a period of years,” she said. And that takes planning.

A gradual transition may be more tax-efficient than a cash sale, she said.

“Discussions (of succession plans and retirement) need to happen early and often. Business owners need to be flexible as their business changes and their needs change,” Thome said. “Remember, you’re building this (business) for a reason, and how will this translate to a retirement income stream … if you don’t plan?”

A functional family

Not all families get along, and when there are family businesses in the mix, misunderstandings, personalities and lack of clear planning can have them butting heads. They’ve been known to disown each other.

Luckily, Michael Scott and his family get along. Scott makes it clear to his three siblings that he’s buying the business from his father, not being given it.

“I said straight out of the gate that I want to make sure I buy it because I don’t want it to be a problem among family members,” he said. It’s never been a problem, and they all get along really well, as do he and his dad.

“I’m more than happy to have my father continue to work,” he said. “It’s truly valuable to have him around.”

Sounds like a win-win for all.

Lee Reinsch of Green Bay worked 18 years at daily newspapers before launching her freelance business, edgewise, in 2007.