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Thayer Partners Blog

3 Reasons Why Business Owners Need a Retirement Plan

[fa icon="calendar"] Apr 11, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

3_Reasons_Why_Business_Owners_Need_a_Retirement_Plan.jpgAll Americans should have a retirement plan, but business owners in particular should prioritize retirement planning early in order to ensure that the sell or transfer of their companies go as smoothly as possible and to maximize their retirement funds. 

As your biggest asset, your company is an important part of your retirement plan. It pays to think about an exit plan early. Here’s why.

1. Getting Fair Market Value If Selling Your Business

You’ve spent the majority of your life building your company, and you want to ensure that you get properly compensated for all of your hard work and dedication during its sale or transfer.

You don’t want to get short-changed because you didn’t have a retirement plan in place that involved a well thought-out and strategic exit plan for your business.

To ensure that you can sell your company to a third-party at fair market value and maximize your financial return, you should get a business valuation to determine the worth of your company—you don’t want someone else telling you what it’s worth or have a value in mind that doesn’t reflect the market. You can’t rely on numbers from 10 years ago—your company is likely worth more now, and it pays to know this.

2. Retire on Your Timetable

If you only start thinking about the sale of your business once you’re actually ready to retire, you might be too late and have to delay your retirement. Without a retirement plan with a sound exit strategy in place, you might not be able to sell your company on your timetable and for the value you would like.

Having a clear idea of what you need to retire comfortably, the market value you can reasonably expect from the sale of your business, and the business sale process will ensure that you can retire when and how you want to, without unforeseen delays. Business owners without a plan often become “motivated” sellers who are likely to leave money on the table in order to get the sale quickly over and done with, so planning ahead is key and can pay huge dividends.

3. Protecting the Continuity of Your Business

Business owners work day in and day out to build their companies. They care what happens to both the company and the employees on staff, and they care about their legacy.

Business owners who care about what happens to their companies and their employees once they retire would be wise to lock down key employees either through a buy-sell agreement or deferred compensation agreements (also known as golden handcuffs) to ensure that they remain employed after a transfer event occurs. Locking down key employees can also help ensure that your company continues to run smoothly after the transfer. It usually increases the sale value of the business as well because the buyer knows the employees who are key to its success will be there after the sale, so he sees lower risk to the on-going business.

Start Planning for Your Retirement Today

It’s never too early for business owners to start retirement planning. Consider your options—do you want to sell to a third party? Transfer the business to a key employee, family member, or co-owner?

Get a free business valuation, create a buy-sell agreement, locking up key employees and commit to having these plans reviewed regularly. This process can ensure that you get fair market value for your company and can also ensure the on-going health of your business and your legacy.

Thinking about your retirement now can also allow you to put the right savings vehicles in place early on to maximize your financial return. Consider implementing a defined benefits plan in addition to a 401K.  Perhaps, you add a Cash Balance plan to the 401K to save even more money pre-tax and lower your tax bill.  Or even set up a Turbo ROTH to insure you have tax-free income in retirement.

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Topics: Retirement Plan

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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