For many small business owners, the business is also their retirement plan. The plan is to sell the business at some point and then retire. The trouble is often in the timing. When you want to sell may not be when good buyers are in the market for your business, or the economy may be in a funk.
If you’ve ever owned two homes at once, you know what I’m talking about. While waiting for your former home to sell, you purchase and move into the new house you want. But now you also have two house payments. After a few months of making double mortgage payments, you tend to get a lot more flexible on the selling price of your former home. Time forces you to accept a lower and lower price for your old home, even to the point of you selling it for what you feel is less than its true value. You’ll be read to do anything (almost) to get out of those double house payments.
That same timing problem can work against small business owners. Once you decide to put your business up for sale, the clock starts ticking. As time goes by and there are no fair offers for your business, your anxiety level can rise. Rather than put any more “good” money into your business (because you know you’re going to sell soon and don’t want to invest more in the business), you may start to let your equipment or inventory or routine maintenance start to slide. Buyers see that and so their offers reflect a lower value. And the downward spiral can go on. Meanwhile you wait.
But if you have a traditional retirement plan that the business is contributing to on your behalf (like a 401k or SEP IRA), the timing pressure is less. The longer it takes your business to sell, the more money is going into your retirement plan. Knowing your retirement account is growing, you won’t feel as much pressure to take a lower price for your business.
So the retirement plan does double duty: it gives you the freedom to wait to sell your business (in essence, literally buying you time and hopefully a better price for your business), and it puts money into your retirement pocket for the future.
Saving for the future is never easy, especially for small businesses strapped for cash now. But if your retirement plan includes selling your small business to pay for retirement, having a traditional retirement plan can help get you a better price for your business and maximize your retirement readiness.