Funding your retirement income from your business depends on a number of factors, so it takes a systematic approach to make it work. I will cover some of the main points to consider to have a reliable retirement income.
The first question to answer is what is going to happen to your business in retirement? Are you going to be involved in running it, either on a full or part time basis? Do you want to maintain full or partial control of the business? Are there key employees or family members that you want to run or buy the business? How long will a full or partial sale of your business take? What is the value of your business, can it currently generate a cash flow to meet your expectations? For many business owners, most of their assets outside their home and possible vacation property are tied up in their business.
If you are planning to sell your business to a third party and move on, things should be fairly simple once the deal is done. Congratulations if Microsoft made your business an offer you couldn’t refuse. Then your only question is, “do I have enough money to retire on”, after the taxes and expenses are paid? I will address how much money it takes to retire in another post.
For many business owners, the situation is more complicated than just selling the business. Their business may have taken years to build, it is a statement of their vision and business values, and they want to have involvement with it going forward. The business may have a substantial value, and family members and key employees who have helped build it have a stake in seeing it continue and grow. The business owner will probably have a desire to participate in the future growth of the company.
Other family members who have grown up with the company, but have not necessarily participated in it, will see the business as part of the overall value of the family, just like a vacation property or cabin, and perhaps feel that some of the future value of the business should stay in the family.
I recently worked with a business owner who was coming up to his retirement years, and has two daughters who are actively involved in the business, are responsible for part of its success, and depend on it for their income. One possible solution that was suggested was to have the daughters buy out their father’s share. But Dad said, “How can my kids buy me out, they don’t have any money?”
Many companies also have key employees who are responsible for a good part of its success, want to know that they have a secure future, and may leave the company at some point if they do not feel they have long term security.
Although every business situation is unique, most of the above situations have come up in one form or another in the past, and there are equitable ways to solve them. Coming up with clear questions and issues that need to be solved is a large part of fixing the problem, and will help in reaching the ultimate goal of getting a retirement income.
The situation of the Dad with the daughters was an example of how these situations can be solved. The business was appraised and the value was agreed upon by everyone involved. This value was to be paid to the Dad from the business income over a period of twenty years from the positive cash flow of the business. The company was turned into a corporation, with voting shares going to Mom and Dad, and non-voting shares going to the daughters. The daughters took over management and were paid a salary for doing so.
That way Mom and Dad maintained control over the company for the time being, but the daughters were in control of day to day management, and owned a piece of the future growth of the company, so they were building for their future. Mom and Dad also had part of future growth of the company, and a twenty year retirement income in the meantime to fund their retirement.