Retirement Planning and the Entrepreneur

By Generational Equity


A new seminal study on the net worth of small business owners illustrates, using comprehensive statistical research, what many of us have assumed for years: Entrepreneurs are woefully underprepared for retirement, and many, if not most, have unreasonable valuation expectations that their businesses will fund their retirement years. Sadly, many are not aware of this situation.

The study by SBA senior economist Jules Lichtenstein is entitled “Financial Viability and Retirement Assets: A Look at Small Business Owners and Private Sector Workers” and is probably the most comprehensive work I have seen on this topic. I recommend that every business owner read it because it is clearly a wake-up call for entrepreneurs.

Karen Klein, a writer for, summarized the 46-page study in her article, “Risking Retirement on Selling the Business.” This is how she introduced Mr. Lichtenstein’s work:

Sell the business. That sums up how many small business owners hope to fund their retirement years. They are “significantly less likely” to have diversified retirement assets than employees do, increasing their financial vulnerability as they get older, according to a new analysis(PDF) from the Small Business Administration.

Take a look at that paragraph again. Per the SBA study, business owners who have risked EVERYTHING to fund the growth of their businesses, quite often have a far less diversified portfolio than their employees do, and, in fact, based on our experience, most entrepreneurs have nearly all their financial legacy tied up in one asset—the business. Many, being less than sophisticated when it comes to wealth management, are completely unaware of the danger of this predicament, and this hazard is compounded with the fact that most have NO idea what their business is worth. Or even worse yet, business owners have a flawed idea of their companies’ values based on some vague industry ratio that they heard at trade show years ago.

Mr. Lichtenstein has clearly exposed the seriousness of this situation in his study:

“There is a risk of significant consequences if the business goes bad. There’s a double-whammy if something happens to that company because you’ll lose your income and your retirement assets.”

To this I will add a sad triple-whammy: You work for years and years expecting your company to fund your retirement only to learn as you begin to entertain offers from buyers that the value of the business is far lower than expected.

Why Exit Planning Matters Today

It is for this reason that Generational Equity, a leading M&A advisor for lower middle-market companies, strongly encourages all business owners with companies having revenue lower than $100 million to begin their exit planning process long before they decide that now is the time to sell.

Here is a critical point to consider: Selling your business needs to be seen as a PROCESS not an EVENT. What does this mean? It means that you need to first find out the value of your business in the market today and then secondly, in conjunction with advice from a wealth manager, determine how large you need to grow the company in order to reach your retirement goals.

As reporter Klein points out:

While many policies have been put in place over the years to encourage small business owners to accumulate savings in specially designed accounts such as SEP (Simplified Employee Pension) and SIMPLE (Savings Incentive Match Plan for Employees) plans, those policies have produced only minor gains…  

Lichtenstein’s study shows that the owners of the smallest businesses, those with 25 employees or fewer, are significantly less likely to hold retirement assets and more likely to depend on home equity as their largest asset.

This is a looming tragedy awaiting many of the baby boomer business owners that are planning to sell their businesses and retire during the next 10 years or so. Far too many have done little wealth management planning, and since they have no idea what their business is worth, they are unprepared for retirement.

However, there is good news. With some planning, hard work, and the input and advice from both a mergers & acquisition advisory firm and a wealth manager, you can prepare your company and grow it so that eventually it is ready to fund your retirement.

Prepping a Business for Sale – Simple Steps to Enhance Value

As you know, there are lots of ways to successfully grow a business and make good money while doing so. However, not all the strategies for growing a company are the same as building a buyer ready business. In fact, sometimes the steps you are taking may be counterproductive for enhancing value in the eyes of a buyer.

A prime example of this is customer concentration. Quite often we encounter clients who are quite proud of the fact that Wal-Mart represents 70% of their revenue stream. They see that as having a stable, blue chip customer. Buyers tend to look at it another way: You lose that customer, you lose 70% of your revenue post-acquisition…very risky. So the answer is growing your business with Wal-Mart but also diversifying with other retailers. That’s not easy; it takes hard work and management, but it is key. Simply put, history shows that companies with little customer concentration can earn higher multiples than those dependent on a few customers.

Another example is having recurring revenue that is documented and contractual. Most business owners like to brag about the fact that the relationships they have with key customers is based on a hand shake and dinner at the country club once a year. Professional buyers are leery of such arrangements because once the current owner is gone, so too are these relationships. Again, companies with proven recurring revenue streams command higher valuations in the market – simple as that.

Now these are just two examples of the literally dozens of value-enhancement challenges we have seen throughout the years. Again, the good news is that if you hire an M&A advisor 2-5 years BEFORE your retirement, then you have ample time to position your company for an optimal buyer. AND you also have time to work with a wealth manager to come up with a comprehensive retirement plan.

OK, sure this takes commitment, some capital outlay (fees), and hard work. But the alternative is far worse. Don’t make the mistake of ASSUMING what your company is worth and what you need for retirement only to determine at the 11th hour that it is far too little. Don’t retire from your business and have your cousin Larry hire you. Plan ahead.

If you look in the mirror and honestly admit that you are woefully unprepared for the sale of your business and retirement, you need to meet with Generational Equity. Our services are designed to preserve and protect the generational equity that business owners have worked hard for years to grow (hence our name). To learn more about how you can prepare your company for your retirement, give us a call at 972-232-1193 or fill out a contact form and we will be glad to discuss our services, our workshops for business owners, and how we might be able to help you.

And special thanks to Jules Lichtenstein for so thoroughly documenting the situation many business owners are facing today: a lack of retirement planning.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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