Small Business Owners – Ways You Can Embrace Retirement in a Bear Market!

Featured on (6.15.09)
Small Business Owners – Ways You Can Embrace Retirement in a Bear Market!
By Mark Fissel, RFC

Most small business owners are faced with the same retirement dilemma. Do these remarks look familiar?

I’ve worked the better part of my life to build a successful business but I’m not sure how to transition it.

My business is unique in that interested buyers are difficult to locate.

Now that I’ve taken risks to build a business, I want to reduce those risks and move money into safer investments.

Naturally, you can see that liquidity and preservation of capital are the common issues that group small business owners together. As a small business owner, I have spent additional time and resources responding to this dilemma.

Here are three techniques you can use when preparing for retirement in small business.

First, ask yourself if you would be interested in deviating from the traditional, upfront sale of your business. The alternative would be a slower transition of ownership. The natural reaction seems to show bias toward one-shot sales. However, many people have experienced great success in transitioning their business to a successor over a period of time. Among other advantages, this allows you as the seller to request and hopefully obtain a premium price. Studies show that buyers are willing to pay more if the option of financing the purchase if offered. Intuitively, the buyer is more comfortable knowing the business profits will assist in paying down the debt or buying out the purchase agreement. A one-time, lump sum might present purchasing issues for the buyer regardless of their credit history. The transition arrangement allows an entrepreneur or enthusiastic businessperson to embrace the new venture through owner financing. You will benefit by obtaining a premium sales price while creating a marketable environment for your illiquid business.

What are your financing options? As the business owner, consider a Lease-to-Buy agreement in which the buyer is paying you lease payments over a predefined period. If the buyer defaults on payments, you’re entitled to exit the agreement and keep the said payments. In a sense, you would have received cash for ownership that was never materially given away. This arrangement also keeps the buyer motivated to continue payments until the entire buy-period has expired. The buyer has much more downside than upside with such an agreement and yet allows them to realize their dream through creative financing. Your downside is obvious because you may get the business back if the buyer is unable to successfully manage and ultimately defaults on your purchase agreement. The silver lining in this scenario is that you have already obtained multiple payments from the buyer before they defaulted. In the end, you’ll receive FULL possession of the business if the agreement was structured properly. Thus, you can sell the business for a second time to a different buyer and realize profits all over again.

Secondly, you can use another business transition method to move yourself out of the day-to-day operations. In a sense, the Leveraged Employee Stock Ownership Plan (LESOP) is a form of financing your way out of the business. Once more, you’re able to obtain a premium sales price because you have created a market for your business. Boiled down, the LESOP allows your business to borrow money from the bank to establish a Trust. This Trust will then be the mechanism to buy your stock in the Company. This can happen in large sums or over a period of time. Your employees are slowly granted stock within the Company as tenure is established. Many studies have shown that productivity and profits have actually increased due to the ownership stake your employees have obtained. This can be a powerful tool to increase profitability, decrease employee turnover and perhaps most important to your retirement scenario, grant you the liquidity and marketability necessary to transition out of the business and into retirement. The icing on the cake is that your Company is able to write-off the interest which accrues due to loan financing. It’s actually considered a business expense! From a personal tax standpoint, you’re able to defer capital gains on the Sale as you gradually sell stock to the Trust.

What businesses might benefit from such an arrangement? Typically, you need 20+ employees within the Company for it to start making sense. As you creep below that number, the administrative costs begin to outweigh the advantages (i.e. actuarial expenses, attorney fees, etc.). Also, keep in mind that your business will have to transition to a C Corporation entity if not already set up in this manner. Please consult a tax advisor to ensure this entity structure will not negatively affect your business.

Finally, look within the ranks of your Company. Business owners tend to share a “do-it-yourself” mentality. This is not necessarily a negative characteristic. In fact, some may argue it’s the reason so many small business owners enjoy success. However, when approaching retirement you may consider a different management philosophy. One in which you empower your employees to take on more ownership in their respective business responsibilities. What will this do for you? It will allow you more time away from the business. Potentially, you could cut your time in half almost immediately. Then over the next year, you could reduce your time in the office to a nominal amount. Not only will this allow you to take advantage of retirement, you’ll still be able to keep your hands on the strategic decisions. The additional time could potentially give you an added bonus. While out of the office, take the time to seek investors or interested buyers. The hardest part will undoubtedly be letting go of some of those daily tasks. I can assure you that once you do, you’ll be pleasantly surprised with the capability and talent of your staff. You’ll find that they enjoy the flexibility and decision-making role they’ve come to assume.

A commonly asked question is whether the current Bear market will derail my retirement plans. The short answer…it doesn’t have to. Consider implementing one of these approaches and I think you’ll find success and peace of mind.