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.