Assess the value of your business and how it contributes to your overall net worth
If you’re like most small business owners, you’re focused on day-to-day operations and have little time to think about long-term plans. But there may come a day when you realize you won’t be able to continue working forever, and that’s often a little late to start planning where your income will come from and how your business can fit into your overall financial plan.
Failing to properly plan for the future of the business – and yourself – could affect your retirement. Sure you could sell your company and retire on the proceeds. But there are many other options, including partial retirement or retaining a percentage of ownership, that could offer a better solution. If and when you decide to step away from the business, you need to know your options, and that means truly understanding the value of your business as it relates to financial and retirement planning. Working with the appropriate insurance, tax, financial and valuation professionals can help bring your professional and personal finances into alignment so that you have a clearer picture of the future.
This is frequently the small business owner’s retirement dilemma: How to leverage what you do every day as an asset. For a successful retirement, you need a plan for reliable income, so consider your options – whether it’s gifting the business, a partial sale or full sale – and the implications for each to create a steady income flow.
To get started, you’ll need to determine the value of your business. Your financial and tax advisors can help you decide which valuation method makes the most sense for your business and can put you in touch with a professional who can provide that service. Recognize that the value of a small business is frequently influenced by intangible assets – such as the expertise of a key employee – so it may behoove you to account for those in the overall valuation.
If your plan is to sell your business, consider the future market for your business and what your ideal buyer will be looking to purchase. If necessary, manage improvements or changes now so that it will make an attractive turnkey operation for your target buyer later. And seek the help of an experienced and specialized intermediary to market the business and find the appropriate buyer.
Perhaps selling outright isn’t what you want. For businesses that generate at least $1 million in profits, a partial sale could be a viable option. This would allow you to get rid of the personal guarantee yet remain invested in the business, generating passive income to supplement your nest egg. The key is to determine the value of your business now and how big a role it plays in your total net worth. When you retire, will you have enough assets outside of the business or will you need to leverage the business to provide a portion of your future income?
There’s your business plan and your personal financial plan: It’s important to integrate them to ensure they are in lockstep with each other. Now is the time to think about these planning challenges – so the work you do today can provide for your dreams tomorrow.
The information contained herein has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Article provided by Thomas M. Jeffrey, Senior Vice President, Investments for Troon Investment Advisors of Raymond James & Associates.