3 Things Entrepreneurs Can Do Today to Prepare for Retirement
February 9, 2015 | Business and Careers
By Sarita Harbour
Some entrepreneurs say they’ll work forever. Yet there comes a point when most business owners want to retire and transfer their ownership in order to enjoy everything they’ve worked so hard to obtain.
Though entrepreneurs may feel anxious about stepping away from a lifelong business, careful planning in anticipation of retirement makes the departure easier on themselves and the businesses they’re leaving behind. Preparing for retirement is not only doable, but with these three steps, such forethought today can set up entrepreneurs for a more secure tomorrow.
1. Begin with the end in mind. If you’re hoping your business will help fund retirement, it’s never too early to start planning, even if your business hasn’t yet launched.
“When entrepreneurs are thinking about starting the business, they should begin with the end in mind,” said Martha Kendler, director of business markets at Northwestern Mutual.
Unlike typical investors, entrepreneurs are unique, Kendler said, because a large portion of their net worth is in their business. By keeping the question ‘When and how do I want to sell this business?’ continually in mind, business owners will be better able to build a saleable business.
Tech entrepreneurs, Kendler noted, are often good examples of beginning with the end in mind. It’s an approach that impacts business decisions from day one. Choosing a niche market and then building a large base of loyal customers and serving them well are common hallmarks of tech businesses sold successfully by their founders. Just look at Instagram, a photo-sharing app purchased by Facebook for more than $1 billion in 2012, or WhatsApp, also bought by Facebook for $19 billion in 2014.
Although sales of this size aren’t the norm, smaller sales are far more achievable. Take entrepreneur James Altucher, who sold his controlling stake in Stockpickr.com to TheStreet.com for $10 million in 2007.” As soon as I start a company, I want to sell it,” he wrote in TechCrunch.
The best way to create a business worth selling is to build a profitable company that doesn’t depend on the founder for success. Here are some tips that should help:
- Decentralize responsibility and delegate to team members. Creating detailed processes for everything from new client acquisition to customer service and beyond allows future owners to build on what you started.
- Maintain a transparent and simple ownership structure to avoid shareholder complications and arguments during a sale, said Ken Wisnefski, founder of interview marketing firm WebiMax, in an interview with Entrepreneur Magazine.
- Make early business decisions with a future sale in mind. When Loren Bendele started his online coupon company, Savings.com, early decisions like those affecting marketing plans were made to attract attention from potential buyers, Entrepreneur Magazine also reported.
2. Create a succession plan. Perhaps one of the most important ways a business owner can prepare for retirement is to create a succession plan. Kendler explained that there are two key elements.
The first requires planning for the unexpected loss of a leader or key employee. This kind of risk management is a critical part of mitigating threats to the survival of your business. Kendler suggested that a good financial professional can help entrepreneurs find solutions designed to manage these risks, such as key person insurance, which may help fund recruitment and training for a replacement.
Secondly, business owners should prepare well in advance for the date when they plan to step away from the business. “This element addresses the orderly transfer of ownership from the current owner to the future owner,” said Kendler. “This allows the current owner to monetize his or her interest.”
Entrepreneurs can accomplish this by selling their interest in the business, perhaps to one or more key employees or to a family member who has also worked in the business. In some cases entrepreneurs keep an ownership interest and receive dividend income to help fund retirement. For such transfers to occur smoothly, a detailed strategy must be in place.
In any scenario, succession planning for business owners may require input from a team of advisors—including lawyers, accountants and investment experts—and it should address the transfer of leadership as well as the financial transfer of a business.
“Having a succession plan is just good business sense,” Kendler said, “because it helps attract strategic partnerships, making your business more saleable.”
3. Contribute to a retirement account. Unlike individuals who may benefit from a variety of employer-offered retirement packages, entrepreneurs bear the full responsibility of selecting and contributing to retirement savings plans. Yet that burden need not be a daunting one, as there are several plans designed to allow entrepreneurs to contribute as themselves and as their business. They can choose from a variety of plans based on their age, personal and business financial situations or the size of their company:
- If you’re a sole proprietor, you may want to make both employer and employee tax-deductible contributions to a Solo 401(k) plan. This plan is like a traditional 401(k) but designed specifically for a business owner with no employees. It can also cover an owner’s employed spouse.
- Another option is to assign up to 25 percent of your net self-employment income to a Simplified Employee Pension, also known as a SEP IRA. This lets employers of any size, including one-person operations, contribute to traditional IRAs set up for employees, including themselves.
- Another option for many employers is a Savings Incentive Match Plan for Employees, known as a SIMPLE IRA, to save for retirement and defer taxes through a combination of salary reductions and employer “matching” contributions or nonelective contributions.
- More established entrepreneurs with significant earnings in recent years may want to consider a professionally constructed defined benefit plan that provides pension benefits to both business owners and employees—similar to the pensions enjoyed by workers at some large companies.
If you’re an entrepreneur struggling to make sense of these retirement plan options, consider getting expert help. A financial professional can help create a plan that is customized to your particular situation and tied to your business—addressing retirement as well as other financial goals.
hether you’re launching a first business or you’re an owner of a well-established company, it’s wise to make today’s business and financial decisions with retirement in mind. Building a business that’s attractive to buyers, creating a thorough succession plan and contributing to a retirement fund are great ways to do this. They’re also smart business decisions.
- Whitepaper: Business Succession: Plan Now for Success
Sarita Harbour writes about personal finance, business and technology. She is a former financial adviser and holds the Personal Financial Planning Designation from the Institute of Canadian Bankers.
Originally published on Northwestern MutualVoice on Forbes.com.