10 August 2020

Advisers Prep Small-Business Owners for Retirement

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Small-business owners often are so busy working that they don't take time to plan for their retirements which is a mistake. Advisers are helping these entrepreneurs more accurately value their businesses as well as their personal expenses, and figure out how to spend their time once they retire.

Financial planner says one of the biggest mistakes small-business owners make is relying too heavily on the sale of their practices to fund their retirements which becomes problematic because they frequently overestimate the value of their business.

For instance, a client valued his engineering firm at $1 million and the highest price he was offered for the firm was only $725,000--more than a 25% discount off his valuation. The firm was his main asset along with IRAs and brokerage accounts worth $700,000. So rather than having $1.7 million, he'd likely have about $1.4 million for retirement. The client was offered less because too much of the business's growth was solely dependent on him. The planner had warned him repeatedly that he needed to change his business development practices and groom successors so that he could eventually fetch a higher price.

Factors such as an older client base, a business too dependent on several large clients and slow-to-no growth can cause a firm's value to be discounted. When preparing for retirement, small-business owners often make the mistake of underestimating their personal expenses. Small-business owners often don't take sufficient advantage of certain products to save for retirement.

Since so many small-business owners' identities are wrapped up in being a business owner, financial advisers should help them figure out what to do with their free time once they retire. Advisers should ask questions such as "As a child, what did you want to be when you grew up?" and "If you found out you had five to 10 years to live, what would you change in your life?" Through these questions, clients can discover how to spend their time upon retirement and gradually give control of their businesses to some key employees.

Click here to access the full article on The Wall Street Journal.


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