Don't Let the Economy Steal Your Retirement (Part II)

Part I of this posting focused on the plight of small business owners in their 60s and 70s adversely affected by the economy, and unable to retire.  They feel forced to hang on for a recovery that is taking too long because they are unable to sell their business for what they believe it is worth.  Funding their retirement was predicated on realizing sufficient funds from the sale of the business.  Now they feel they either have to delay retirement or keep working indefinitely.

Here are some suggestions that may help you if you are one of these individuals or know someone in this situation:

·       Consider a phased retirement

·       Accept that you may not sell your business for the price that you think it is worth.

·       Structure the sale to make it more attractive to the buyer.

·       Be flexible and offer creative financing by leveraging the business profits to help make the sale and get closer to your target price.

Let’s say you are 61 years old and your goal was to retire at 62.  You have a catering business that you believe was worth $1 million three years ago, but now may be worth only $750,000.  You had planned to sell it for $1.1 million because that is what you believed you needed for a comfortable retirement.  You received an unsolicited offer from an informed prospective buyer earlier this year for $500,000.  You laughed and told her she must be joking.  But by structuring the sale and leveraging the business profits you may be able to realize close to your goal of $1.1 million.  Perhaps the buyer’s offer assumed that you would no longer be involved in the business, and some loss of customers would occur due to your absence.   

Consider this scenario:  Instead of brushing her offer aside you tell her that her offer is well below what you would take, but there are some options for making such a deal.  First, and most importantly you are willing to stay on for a temporary period.  This would assist her in the transition and help to minimize the loss of any customers.  You would make her a counter offer asking her to pay you the sum of $250,000 for 25% of the business.  You would receive a salary of $100,000 for the next three years with an agreement requiring you to work 30 hours per week instead of the 60 or so that you have been working.  At the end of three years assuming that certain revenue and profit goals had been achieved, she would pay you $300,000 and you would receive a consulting contract with a non-compete clause for three more years paying you $50,000 per year.  At that point you would transfer the remainder of the company to her.  In summary your deal would be as follows:

       

        Payment for 25% of the company at contract signing…………... .……..$  250,000

        Salary for three years at $100,000 per year................................................300,000

        Second payment at the end of three years……….......................................300,000

        Three-year consulting/non-compete contract at $50,000 per year………..150,000

                                                Total                                                               $1,000,000

 

The buyer’s cash outlay would be $550,000 or 10% more than her offer with only $250,000 payable up front and three years to pay the balance.  The remaining $450,000 would be paid from the business earnings over a period of six years.  An additional benefit from this arrangement would be a phased retirement by the business owner which can often be helpful to new retirees.

Should the revenue and profit goals not be met the deal can be modified or possibly continued for two more years depending upon the wishes of the parties.  This is one example of structured deal-making that would allow the business owner to retire at 65 and receive an additional $50,000 per year until age 68, allowing more time to accumulate the necessary funds for his retirement. 

Other variations of this example may also work and often can be uncovered through continuing negotiations.  Installment buy-outs can often save the seller taxes depending upon the specifics of the sale.  Taxes should always be taken into account as it is the after-tax proceeds from the sale that will help pay for the seller’s retirement.  Always have your tax advisor review the proposed transaction.

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Business owners should aim to save for retirement outside of the business since they can never be sure of what the business will fetch when they are ready to retire.  One of the best ways to do this is through the use of a tax advantaged retirement plan for the business owner and his employees.  In many cases retirement plans can be designed to benefit owners and key employees without violating IRS non-discrimination rules.

Don't Let the Economy Steal Your Retirement (Part I)

The Wall Street Journal recently published an article entitled “The Economy Stole My Retirement”.  The article was based on an August survey of 799 small business owners conducted by the Journal and Vistage International, an executive-mentoring organization.  Nearly half of the business owners expect to retire after age 65, with 38% saying that their planned retirement date is later than they had predicted five years ago.  In addition, 56% said most of their retirement nest egg is tied to their business.

The recession has hurt many small businesses by negatively impacting their earnings.  Reduced earnings lower the value of the business and can reduce or eliminate contributions to retirement plans.   Many small business owners planned to sell their business to help fund their retirement.  Now they are discovering that their businesses are worth less than they were three years ago and there are fewer buyers.  In the first half of this year 3,332 small businesses exchanged ownership, down 40% from the first half of 2008.  The article cited specific examples of small business owners who are now in their 60s and 70s and find themselves in “business purgatory”, unable to retire and forced to hang on for a recovery that is taking too long.  Others have made the mistake of looking at their business as the principal component of their retirement nest egg.  These folks failed to heed one of the basic principles of investing, which is to diversify your investments.   Making the assumption the proceeds from the sale of your business will be sufficient to fund your retirement can be a risky strategy since the business may not be worth what you think it will bring (especially now), and your business may be worth less when you are no longer involved.

Before you conclude that delaying retirement or not retiring at all may be the only options available, you may be surprised to learn that there may be better alternatives.  First, understand that you are not likely to sell it for what you think it is worth in today’s market.  Second, by structuring the sale of your business in a manner that makes it more attractive to the prospective buyer you may be able to facilitate your retirement and even get closer to your price. 

Part II of this posting will offer several suggestions and an example of a structured sale for those business owners that are interested in selling their business, but cannot wait for the economy to recover.