Will Selling Your Business Fund Your Retirement?
Will selling your business fund your retirement?
Ask entrepreneurs about their retirement plan and it is likely their answer will be, “My business is my retirement plan”.
But while most business owners plan to sell their company to fund their retirement, the three key variables are:
- How much money do you need in retirement?
- How much might you receive from the sale of the business (and the taxes you’ll pay)?
- What will you do with the proceeds from the sale of the business?
So, in asking the question, “Will selling my business fund my retirement?” The answer is: It depends.
Variable #1: How Much Money do You Need After Selling Your Business?
What lifestyle level will you be looking to maintain? Will you be simplifying? Or will you be expecting to maintain the same lifestyle you enjoy now? How much income will you need or want after selling your business? Will you want a fixed amount of income every month or a variable amount that you can access on-demand?
A Registered Investment Advisor will seek input from your CPA, and then model several approaches to building an investment portfolio to accommodate your specific wants and needs.
Variable #2: How Much Will You Receive from the Sale of the Business?
As we explained in our recent blog post, “3 Things to Do Before Selling Your Business”, you do need a reasonable expectation of what someone will pay to buy your business. Ask your CPA for assistance on this, or visit with a business broker who has good familiarity with your industry.
Knowing the estimated value of your business will allow you to make realistic, well-informed decisions about its sale and the amount of money you may receive from it. Being unaware of the value of your business is never good. You don’t want to make critical decisions about your financial future based on guesses, hunches or irrelevant comparisons. Take the time and make the effort to gain a reasonable understanding of its value.
Variable #3: What Will You do with the Proceeds from the Sale of the Business?
We hope that your business sale results in a real windfall for you. We all want to enjoy the rewards of our work and spend the rest of our lives without financial worries. Yet, it is a somewhat common and very disappointing event when a business owner successfully sells a business and expects to retire, but runs out of money a few years later and has to return to work.
As we explained in another recent blog post, “3 Reasons to Talk with an Investment Advisor Before Selling Your Business”, large windfalls from selling a business can introduce new problems. These new problems may appear as temptations to reward yourself too much or to “give back” too much, which may end up reducing your principal too much.
Visiting with a Registered Investment Advisor long before business sale proceeds are received can provide the strategic outlook and mindset you need to create your plan. Registered Investment Advisors are bound by a fiduciary duty to always put their client’s interests above their own. This means you can trust that the advice received will always be specific to your best interests.
So, it all depends.
Will selling your business fund your retirement? It depends on how much you need, how much you expect to receive (and pay in taxes), and how your post-sale money will be put to work for you. Speaking with a Registered Investment Advisor as early in the process as possible can increase the likelihood that that selling your business can help fund your retirement.
Ned Karren is a Chartered Financial Analyst and a Registered Investment Advisor. He is a founding partner at KKRA, opening the firm in 1983. Ned earned a degree in Economics at BYU (1967) and an MBA degree from Northwestern University (1969). He is a portfolio manager and holds primary responsibility for the KKRA’s Growth Equity Strategy.