SHOW NOTES: 2020-10-22 MiM

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Last Week’s Question of the Week: What is the average price for a new “light” vehicle in the U.S. in 2020? Is it $15,000 or more than $35,000?

ANSWER: More than $35,000.

HOST: On this show you regularly speak about the income sources you will likely have when you begin retirement, but today you are focusing on if you are a small business owner and what that can mean to your future retirement income flows?

KLAAS FINANCIAL: As retirement planners we often work with small business owners and this is often a completely different conversation than the situation where the person will simply be collecting their social security, maybe a pension, and maybe dollars from their IRA’s or investments. Perhaps in this case, a majority of the person’s future retirement income is all bottled up in their own business which can be more complicated.

As a business owner, assuming you do want to retire at some point in the future, you will have to fund your own retirement plan and decide what to do with your business before you retire.

So, what to do if this is you?

Many retiring business owners decide to sell the business. The proceeds from the sale can help to fund retirement. This might be a situation where you will create monthly income from the sale for a period of years. The process of selling a business can be difficult based on either the type or location of a business and ultimately the marketability of the business. Are you creating a legacy or are you going to run the business into the ground so to speak where there is no residual value to you or anyone else?

Selling a business can be emotional. You have probably spent years or even decades building up your business, products or services. You may know your employees well and want to make sure they are cared for. So, what are your first and next steps and how do you proceed?

Most business owners do plan on selling when it’s time to retire so they can pursue something else and enjoy a little free time and, of course, use the sale proceeds to fund their retirement. In fact, 78% of small business owners plan to sell their company to fund 60-100% of their retirement, according to CNBC and the Financial Planning Association.

HOST: What tips can you give our listeners on how to prepare to sell their business before they retire?

KLAAS FINANCIAL: The key word is taking the steps to sell before retirement, planning is crucial to make this work out as you would like. Here are six tips for getting ready to sell your business before you retire:

  • Get an appropriate valuation. First you should determine what your business is worth. This can take some time and research. You’ll want to start by taking stock of the assets and liabilities. Then look at your profit from recent years. You should also check out similar businesses in your niche to see what they might be selling for. It can be helpful to consult with an experienced professional before initiating a sale. Sometimes you’re not planning to sell your business, but a potential buyer comes along with an offer you can’t refuse. Or, you are not ready to sell, because business owners are usually never ready to sell until they have to. However, it’s still a good idea to double check that the offer lines up with the valuation of the company you built.
  • Create a succession plan. You don’t want to leave your business suddenly, especially if the goal is to keep things going for your employees and customers. Take time to work with your buyer on a plan of succession.  Introduce the buyer to your employees, business processes and customers. Show the buyer what it takes to keep your business running smoothly.
  • Consider whether your children want to be involved. You might decide to hand over the reins of the business to a child or partner. You may still be involved on some level, but in a scaled-back way that lets you feel retired. However, your heirs might not want to run the business. Talk with your children now and find out their wishes. Don’t assume they want to take it over. Maybe you have aspirations of running a multi-generational business, but your children have other plans. If the children have no interest in taking over, it is better to know this sooner than later, and then plan to sell the business to an eager new owner rather than trying to force a poor fit.
  • Work with a business contracts attorney to set up how you want the sale to occur with either a lump sum, or a down payment followed with equal installments (like a pension) that you would receive over a period of years.
  • Work with your tax accountant to consider the taxability of selling your business.
  • Work with your financial advisor to see what your retirement cash flow will look like when this asset is disposed of, together with your other sources of income such as social security, spouse, and investments.

HOST: What if you have an employee who may be interested in taking over?

KLAAS FINANCIAL: Great point, keep your eyes and ears open for this and perhaps actively groom that person. This will be appreciated by them, the other employees, and your customers. Other tips include:

  • Train your employees. Having well-trained employees, especially at the management levels, will make your business easier to sell and help ensure that things stay on track as much as possible. If you have been doing most of the management on your own, take a year or two before you sell to train employees to do some of this work.
  • Think about your base of customers. As a business owner, you want to take care of your customers. So, you’ll want them to continue to be served after you retire. Finding a good buyer to continue running your business is a good way to do this.
  • Be ready for the emotional work. Many people find that retiring is more emotionally difficult than they thought it would be. This may be even more true of business owners. You’ve invested a lot of yourself into this business. You’re emotionally invested in your product. Maybe your business was born of an excellent product idea that you want to see continue. In this case, allowing for a buyer may mean you get to see your product grow and flourish.

When you sell a business, you’re stepping away from something that’s very important to you. Be ready to process the grief that can also come with these actions so that you can move on to enjoy your retirement years.

HOST: Kelly from our Money in Motion Listener Corner asks: Someone at work told me that if I retire at 55 that I can take money out of my retirement accounts without any penalties and taxes. Is this true?

KLAAS FINANCIAL: Well, part of that may be true. In the year that you turn 55, if you leave/separate from service from the company you are working for (IRS Publication 575, the Rule of 55 allows an employee who retires, quits, or is fired at age 55 to withdraw without penalty from their 401(k). This applies if you leave your job at any time during the calendar year in which you turn 55 or later. This only applies to funds withdrawn from a 401(k) or 403b. So yes, you can in fact take money from the 401k that you currently have and not be faced with the early withdrawal penalty of 10% for taking it prior to the 59½ age. However, you will still have to pay income taxes on this money because it was in a tax deferred account.

This Week’s Question of the Week: What percentage of small business owners intend on selling their businesses to create future retirement income? Is it 25% or almost 80%?

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.