Millions of small business owners across the country may be getting to the point at which people their age generally start to consider what their retirement is going to look like. However, it seems that very few of these entrepreneurs have a focus on what their post-career life looks like, in comparison with those who work for other people’s companies. Experts say that this could, however, create some major problems for their firms in the long run.
“17% of people who are at least 65 have already retired.”
Every month, hundreds of thousands of baby boomers across the country turn 65, and more than 1 in 6 who are at least that old have pulled out of the workforce, according to a report from CNBC. That number has almost doubled in the past five years alone, and it certainly presents older small business owners with something to think about. But unfortunately, data suggests that very few of these independent owners have actually done so.
A poll from the news agency shows that nearly 4 in 5 small business owners say they’re just going to sell their companies to someone else when it comes time to retire, and that money is being planned on heavily to fund retirement overall. Indeed, many say that they think the money from a sale will cover anywhere between 60 percent and 100 percent of their expenses once they’re done working, the report said. But at the same time, only about 3 in 10 owners have actually sat down and drawn up plans for how they’re going to go about selling their companies. And that could pose a major problem for the small business sector as a whole.
That’s because data shows that as many as 10 million small business owners will either close or sell their companies over the next decade or so, specifically as a means of funding their retirements, the report said. And already, 65 percent of small businesses sold in the first quarter of 2014 were on the part of baby boomers. Most owners don’t conceive of their companies as being anything but a way to drive their own incomes in a lot of cases, so switching over to not receiving pay in that way could be a big change for companies and owners alike.
“There is a huge perception gap among business owners of what it really takes to have a successful payday at the end of their career,” Dave Yeske, a certified financial planner and managing director of Yeske Buie, a San Francisco-based advisory firm, told the news agency. “Selling a small business is not easy; it is very difficult to monetize a closely held business.”
What else can be a problem?
But when it comes to offloading these enterprises, the second-largest issue owners find is that when they try to sell their companies, they can’t always track down a buyer, the report said. This factor was cited by 28 percent of all owners as a major hurdle, a little behind the 33 percent who said letting go of their firms emotionally was the biggest difficulty they faced. In the end, 31 percent of owners end up selling to family members, and 23 percent sell to one of their employees.
And that can pose problems of its own for previous owners who want to retire comfortably, the report said. That’s because 42 percent of all small business sales are made by the new owners making payments in installments, while another 34 percent of entrepreneurs agree to earn-out deals, both of which pay off over time and don’t necessarily guarantee owners the financial stability of getting a lump-sum payment. In addition, 14 percent of these sales also pay out to owners in the form of stock in the company, which likewise may not be ideal depending on each owner’s personal financial situation.
Further, more than 2 in 5 owners cite concerns about how well their family members can run the business on their own, the report said. Slightly less than 1 in 3 also say they’re not sure how much their employees or current customers will like dealing with any potential new owners they might come across. Another 31 percent say they’re also worried about family members fighting with each other about how companies should be handled going forward. All of which makes the formalizing of a succession plan vital to the ongoing health and financial security of a small business.
Owners who want to make sure their companies are in the best financial shape possible moving forward may want to consider the benefits of cutting their ongoing costs, including some of those for small business insurance. By finding more affordable general liability insurance, for instance, they may be able to save thousands annually.