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It’s difficult for small business owners to prepare for retirement. But the biggest mistake isn’t about waiting too long to start—it’s not planning at all.
Perhaps one reason that some don’t plan is that most small business owners don’t want to retire. According to the Wells Fargo/Gallup Small Business Index, 53% say that’s not their desired career outcome.
“I really enjoy what I do,” says Michael Wood, owner of Providence Homes, a homebuilding company in the Dallas-Ft. Worth area. “I see more of a transition than just stopping work.”
But Wood would still be counted among the 47% who want to retire eventually (in whatever form that takes), and among the even larger group of people who say they wish they’d started planning sooner.
Despite the extra obstacles small business owners face when it comes to retirement planning, they can take some key steps to make sure they’re saving enough and that the business is being properly managed so it can be sold some day.
“I believe that it is harder for small business owners because they view their company as a job,” Jan Haugo, CEO of ICBUSA, says about retirement planning. “The day-to-day work gets in the way, and the vision of what a company should be gets lost. An excellent image to think about is to set your business on a path so that someone would want to buy it.”
Haugo says this work entails putting things in place to make the business attractive, such as health insurance and retirement benefits, as well as developing a strong culture and staff.
“When you start your business, look at it as an asset that you need to grow and care for just like your clients’ businesses,” she says. “Make it valuable.”
Along those lines, Wood says he should have hired an accountant in the early days of his business. After all, records have to be kept properly so the business can be appraised.
“You’ve got to be building your business to be sellable,” he says. “I think I could’ve done better with that. That’s your ace in the hole.”
Stacy Kildal, founder of Kildal Services LLC, says small business owners need to do a good job of making retirement a part of their goals, along with accumulating assets not related to the business and planning an exit strategy.
“I believe that many put it aside, in the ‘I’ll get to that later’ list,” she says of retirement planning. “Some are focused on running and growing the business—looking to the future but not necessarily far enough out. What sort of succession plan will be in place? Will you close shop or sell? Bring in a family member or partner to take over? If the choice is to sell, many don’t get a professional business valuation or work with a business broker to find a qualified buyer.”
These are big questions with difficult answers—and they’re also questions that many young entrepreneurs don’t even know to ask. Only about a third of small business owners have a succession plan, and about a quarter expect the sale of the business to be a major source of money for their retirement, according to the Wells Fargo/Gallup Index.
“Experts generally estimate that succession planning should begin 15 years before you intend to retire,” according to SCORE, a nonprofit association that helps small businesses. “This way you have time to oversee your successor as he or she learns the business and hones his or her skills.”
SCORE outlines five steps to succession planning: choosing a successor, developing a formal training plan for that person, establishing a timetable, preparing for your retirement, and transitioning the business to the successor.
But even if the plan doesn’t involve a successor, there’s still a lot that needs to be done.
When Wood started Providence Homes in 1981, he didn’t have much business experience and wasn’t thinking about an exit strategy. “You kind of put what you have at risk and go start your business,” he says. “Retirement is not part of the equation. As opposed to being an employee of someone, there’s no structure in place for that, and that’s where a lot of small business owners drop the ball. That’s an expense they can’t bear at the beginning.”
Before they know it, the years go by. For Wood, a couple of decades passed before he started making retirement plans.
“It’s not like a regular job,” he says. “You have good years and bad years, and you don’t understand the structure of it.”
Haugo offers a way to avoid setting yourself up for an uncertain future: “Include a budgeted line item of how much is allocated for retirement. That should be included in your numbers so that you can appropriately have enough money to save.”
Wood tried IRAs but the process was too slow, and he was never sure where to put his money. He says they’ve been doing well just to break even with that type of investment, but he has since started looking into real estate as an alternative.
“We just feel like that, for us, it’s going to be a better move because the stock market is so fickle and it takes so long to recover your losses,” he says. “People say leave it in there, but it’s hard when you see it dropping. We finally had lost so much money that we’re not doing it again. For retirement and things like that, we’re looking at different income sources like passive income or doing something that’s a little more tangible.”
Owning the business often takes precedence over planning for the future—but the thought of “What’s next?” should always be considered. When people start their businesses, Wood says, they generally don’t have the discipline and the set structure of an established business—which is why hiring an accountant is so important.
“You’re always waiting for next year,” he says. “’Once my business gets profitable, I’ll take care of those things.’ It’s hard to appreciate the pitfalls of not hiring one. You’re not going to do it yourself. How can you put money into retirement if you don’t know if you’re profitable yet? It’s probably one of the hardest things to do as a business owner or someone who’s self-employed. It’s just very hard to do because your money is always at risk.”