It can be tempting for a business owner to keep putting off thinking about retirement. But there are good reasons to have a transition plan in place, regardless of your circumstances.
Planning for retirement is a long way down the to-do list for many business owners. Some give it no consideration at all.
However, even for those who want to keep working well into their later years, having a retirement plan in place is an important safeguard. This is because, at the very least, it provides options. Even if you have no intention of retiring for a long time yet, you never know what life has in store or how your thoughts on the subject might change. Who knows? You may decide far sooner than you expect that you're ready to finish full-time work.
According toa 2017 survey by the US-based Exit Planning Institute, many business owners have 80% to 90% of their financial assets based in their business. Their only viable retirement plan is, therefore, to sell all or part of their shareholding.
Even if they would rather never do this, they should still have a strategy in place if it were ever to become necessary. Because only addressing the possibility of a transition when it has already become urgent is likely to lead to issues such as a loss of value through a forced sale, a lack of a sustainable succession plan, or even an inability to realise any value at all because a buyer can’t be found.
Making plans
The research by the Exit Planning Institute found that 88% of business owners have no written transition plan in place, and 66% have no plan at all. More than half said they had given little or no attention to a transition plan, even though a significant majority of the respondents were 51 or older.
This highlights the broad need for business owners to give this more consideration. And there are some key factors to take into account beyond just how you could sell a business and what you could sell it for.
Firstly, for a business to be truly valuable to anyone else, it needs to be able to operate without you. So whatsuccession plan do you have in place? Have you identified and developed individuals within the organisation who can take leadership roles?
Secondly, have a clear plan for how the business can continue to thrive without your day-to-day involvement. Empower key employees, delegate responsibilities, and establish systems and processes that will sustain operations regardless of who is in charge.
These issues are not just vital for the sale of a business to fund a retirement. They are equally crucial to a transition if the business owner were to pass away.
Have a Plan B
Also bear in mind that no matter how successful a business might seem, it can be totally derailed by things outside of your control. For example, we recently saw how a global pandemic forced many businesses to close almost overnight.
It is natural for entrepreneurs to want to reinvest all of their profits back into the business, and even use any previous retirement funding as capital. They see this as their best opportunity to grow their wealth.
However, it is also a high-risk strategy. Even though you have full control and intimate knowledge of the business you are running, concentrating all of your wealth in one asset is always inherently risky.
All business owners should therefore invest in a Plan B as early as possible. Have a separate retirement fund in place that you contribute to regularly. This way, an unexpected business failure will still be painful, but it won’t ruin you completely.
Don’t neglect emotional preparation
For many entrepreneurs, the worst part of any transition iswhat to do with themselves once they step away from the business they have built. This is probably the primary reason why many never want to retire.
In his bookThe Retiring Mind: How to Make the Psychological Transition to Retirement, Dr Robert Delamontagne notes thatmany retirees experience anxiety, depression and even debilitating feelings of deficit.
"People can go through hell when they retire and they will never say a word about it, often because they are embarrassed,"Delamontagne writes. "The cultural norm for retirement is that you are living the good life.”
For business owners, these emotions are likely to be amplified, since building and running their business is often by far the largest part of their lives. Stepping away can feel like a huge loss.
As part of any retirement plan, business owners should therefore think about where they will shift their focus, whether to mentorship, community work or some other personal interest that they didn’t have time for in the past. Strengthening social connections through family, friends and organisations such as sports clubs or special interest societies are also critical to maintaining balance and enthusiasm for life.
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