Simple Steps Help Business Owners Plan Retirement, Exit Strategy

By Tommy Powers

For many business owners, running a profitable company is their main concern and retirement planning is often an afterthought. But it doesn’t have to be that way. By taking a few simple steps, owners can greatly ease the stresses of planning for retirement and preparing a financially smart exit strategy from their business.

Identify a retirement date

As a first move toward prepping for those golden years, First Tennessee Bank Vice President of Financial Planning-Chattanooga Tommy Powers, CFP(r), recommends that owners identify a preferred retirement date from their business and partner with a financial planner to identify the funds necessary to maintain their desired lifestyle. Financial planners then project this money over the owner’s life expectancy and contrast it against the anticipated available resources.

'Business owners devote so much energy to building and growing their business that they often neglect the other parts of their financial well-being,' Powers says. 'A financial plan can help make sure that business owners exit their business in the most tax-efficient way, and that their expected resources will meet expected needs.'

Decide whether to sell or gift

When exiting the business, the decision of whether to gift or sell the company plays a large role with projected future resources. To accurately determine the impact that this choice will have on the owner’s capacity to meet his or her retirement needs, an analysis of the cash flow and tax ramifications is necessary.

Many financial planners generally recommend that business owners obtain a business valuation every few years to professionally ascertain business performance. This is especially important if a sale or gifting is in the foreseeable future.

'There can be substantial tax consequences if the owner decides to sell the business outright,' Powers says. As a result, some may wish to collect payments from the sale in installments to stretch their capital gains and tax liability. 'Installment plans can be a good choice for companies with hard assets such as real estate or equipment. This way, there are items that can be sold in the event the company goes under before the full payments can be made,' he explains.

Also, at any point in the life cycle of a business, Powers advises owners to put in place a succession plan to address various contingencies such as a premature death or a disability.

Diversify assets beyond the business

Advisors typically encourage business owners to diversify holdings beyond their business to include other assets such as an investment portfolio. An investment portfolio can usually be started in the form of a retirement plan at the business.

As one means to save for retirement, Powers suggests that owners consider an employee stock ownership plan, which allows owners to, in effect, sell part of their stake in the company to employees. With this or other income, owners may then wish to place money into various investment and income portfolios to fund retirement needs.

When deciding on investments, Powers advises owners to save money in a variety of tax-advantaged accounts, including traditional and Roth individual retirement accounts (IRAs), where they are able. 'By having different buckets of taxable, tax-deferred and tax-free income from which to draw, owners increase the flexibility of their financial situation and have greater control over their annual exposure to taxes,' he says.

Contributions to Roth IRAs are not tax deductible, for example, but the investment and any gains are tax free upon withdrawal.1 Tax-free withdrawals are especially attractive to investors who may be in the same or higher tax bracket in their retirement years. Plus, there are no required minimum distributions for the owner at age 70 1/2, as there are for typical qualified plans and IRAs.

Increase breadth and depth of advice

To generate and help maintain a comprehensive financial plan, business owners may wish to consult with a financial planner. After establishing a financial plan, Powers advises owners to update it every few years to reflect evolving federal estate tax laws and other changes.

'Everything from cash flow to income taxes to investment posture can change as a result of an owner exiting his or her business,' Powers says. 'A financial planner provides additional depth and breadth of advice to identify inefficiencies, traps and opportunities within and across these individual areas to help owners ensure their personal financial well-being beyond the business.'

To help business owners with their retirement needs, First Funds offers a variety of stock, bond and money-market portfolios, including a Tennessee Tax-Free Portfolio, a municipal bond fund, and a Core Equity Portfolio, a large-cap core fund. Additionally First Funds provides tax-advantaged investment vehicles, such as Roth IRAs.

For more information see www.firstfunds.com.

Tommy Powers is Vice President of Financial Planning-Chattanooga for First Tennesee Bank.