Preparing for Retirement: How Business Owners Can Ease Retirement Fears and Concerns

Stratus founder Sam Brownell was recently featured in two articles on retirement planning for business owners – Advisors Allay Fears of Clients Unnerved By Pandemic in U.S. News & World Report, and Managing a Small Business Owner’s Retirement in Financial Advisor IQ – and wrote this blog post as a follow-up piece with his full thoughts:

As the pandemic has heightened everyone’s stress, we have found that many of our clients and other business owners we speak with have numerous fears and concerns around their retirement, and may not only be emotional, but potentially misinformed as well.  For example, we have seen business owners reject relief options because they do not understand them.  We have also seen business owners think about abandoning well laid-out succession plans because the economic environment is not what they expected.

In our experience, a tough year feels much longer than a good year, so it is easy to lose perspective when business is poor or volatile.  However, if you are a business owner (or any investor), reviewing your plan to make sure your goals have not changed is the first step toward reassuring yourself that making an emotional decision is a short-term way to create longer-term pain.

Tips for the Business Owner and Family

1. Get an Updated Valuation^[1]: The past 12 months have been a roller coaster for everyone, and this includes your assets.  While your investment accounts have been volatile, if you have a goals-based financial plan that will allow you to think long-term – especially during moments of intense anxiety like the current pandemic – it can be easier to ride out short-term noise.  But while tracking the value of your investment accounts is generally no more difficult than logging into your online account, business owners have to contend with a separate asset that is oftentimes the most valuable piece of their financial portfolio: their business.  Because the pandemic has had an uneven impact on different industries, having a valuation professional who specializes in your industry give you a current valuation can provide you with information that will allow you to assess your readiness for retirement.  By creating a balance sheet that compares your assets (e.g., a current business valuation, the value of your investment accounts, and the value of your real estate assets) to your liabilities and cash flow (e.g., mortgage, utilities, and groceries) you will have a better idea of whether your current net worth will fund your desired retirement.
   
   
2. Check Your Legal and Estate Documents: For many folks, it is not uncommon to set up an estate plan and then not review it as your personal and professional situation changes.  We find the same is true of business documents (e.g., operating agreements, buy-sell agreements, life insurance, key-person insurance, etc.).  This means there is even less chance that your estate documents and your business documents are coordinated.  For example, do you own the real estate where your company operates?  If so, how is it titled?  Further, how is your family compensated for your share of the business should you die unexpectedly?  And finally, have you updated your beneficiaries and put in place trusts to protect loved ones?  By having an advisor who can coordinate advice from your CPA, your attorney, your insurance broker, and your banker, you are more likely to cover important areas that are vital to your retirement and to smoother intergenerational wealth transfers.
   
   
3. Diversify Your Net Worth: We are all accustomed to diversifying our investment holdings.  However, if you are a business owner, it is also important to diversify your net worth.  Because you spend so much time investing in your business, many business owners approach retirement relying almost solely on the sale of their business to fund their retirement.  This can cause issues because most businesses are not worth as much as the owner thinks and can leave the owner and their family facing the prospect of a reduced standard of living in retirement, or having to continue to run a business long past when they are effective leaders.  Therefore, make sure you work with an advisor who can help you diversify into retirement accounts, brokerage accounts, and real estate so your money has more avenues for growth.  Further, within the investment accounts, it is often better for business owners to own a mix of more stable large cap stocks and bonds.  An illiquid asset such as your business comes with increased risk, especially when it comes to the price a buyer is willing to pay, so it can be prudent to use your investment accounts for stable growth – not speculative appreciation.
   
   
4. Coordinate Your Personal Financial Plan and Your Business Succession Plan: Just as with your estate and business documents, coordinating your personal and business planning is crucial to a successful retirement.  Too often, the plan for the business owner is to run the business and then sell it to retire.  This oversimplifies the process because it does not account for what goals the business owner has in the future and how they plan to fund those goals while protecting their net worth and their family.  Therefore, work with a team of advisors (e.g., CPA, lawyer, banker, financial advisor, insurance broker) who can coordinate your personal and business planning, so you know how much your business needs to be worth to fund your future goals, who might run the business when you leave, how to sell it in the most tax efficient manner, and how to make sure your family will be protected should anything happen to you.

One interesting trend we are seeing come out of the current environment is that the pandemic has caused a lot of business owners to contemplate a difficult situation: "I survived and pivoted following the Great Recession of 2008-2009, do I have it in me to do that again?".   They then must contemplate how COVID has impacted the value of their business and whether there are willing buyers (either internally or externally) for their business, both of which impact whether they will be able to retire.  Therefore, for many clients, we are discussing a multiyear transition where the owner brings on a business partner that allows them to step back from day-to-day management but maintain a paid role either as a board member or a company consultant.  This strategy has the benefit of removing some risk from the business owner's asset portfolio, decreasing the hours they put in every week, and providing a stream of cash flow from their continued work with the business.