Retiring can be complex for small business owners — these four questions can help guide you

Key points:

  • Crises like COVID-19 may lead older small business owners to consider retirement.
  • Retiring as a small business owner has unique challenges.
  • Set a course by thinking through the why you’re retiring, and the various options for exiting your business.

More than half of U.S. small business owners are older than 50, and some may have started thinking about retirement during the COVID-19 crisis. While this could be a good opportunity to transition your business, retirement for small business owners can be complex. It involves big decisions about what happens next for the company you built, as well as your personal finances. Robert Buchanan, the head of Business Transition Planning at Wells Fargo Private Bank, recommends you consider these four questions.

1. Why are you considering retirement?

Take a step back to think about the reasons you want to retire. Some older business owners simply are ready to let the next generation take over; a younger team may be more equipped to navigate your business through the changing landscape created by COVID-19.

Buchanan says it’s normal for business owners to come out of a crisis thinking they’d prefer not to endure another one. The Great Recession, he says, “sparked a huge wave of mergers and acquisition activity [because] owners didn’t want to go through that again.”

If you’re in a similar place, he adds, now may be the right time to take a step back. But what that means, and what retirement might look like, is likely to vary greatly depending on your business and your personal circumstances.

2. What are your personal circumstances?

The retirement decision is “really a balance between what you want to achieve financially, the risks you’re willing to take, and what you want to achieve personally,” Buchanan says.

That’s because many owners plan to use their business as their nest egg. Roughly a third don’t have retirement savings. Consider these numbers from 2019, when small business was thriving.

Small business owners lack retirement savings. 37% lack profits to save for retirement. 21% invested retirement savings into the business. 18% plan to fund retirement by selling the business. Source: SCORE, 2019

If you’re among the business owners who don’t have significant retirement savings, you likely need to sell your business in order to afford retirement. “If you need the value that’s locked up in that business … you can’t just shut it down and walk away,” says Buchanan.

But there are many ways to go about selling your business, from selling all, to a portion, to a sale structured to provide you with shared revenue in the future.

In order to figure out what options you may have, consider your income needs in retirement. The best way to do this is to speak with your financial advisor. They can factor in criteria you may not have thought of, such as the value of your house, the economy and stock market performance, the value of your business, and more.

Action tip: If you aren’t already working with a financial advisor, Wells Fargo can help you plan for retirement in a way that works for you.

3. Do you have a transition plan for your business?

In addition to figuring out your personal financial needs when selling your business, there’s also the company to consider. “There are so many different variations, so many different options,” Buchanan says, for how to build a succession plan for your company.

One thing Buchanan doesn’t advise is simply dissolving your business. That’s because a business is almost always worth more when you sell it as an operating company. The big question is: What does that transition look like? Consider basic succession plans like passing the business to your children or selling to a competitor.

Think about how much involvement you want to have in the business going forward, if any. If your children aren’t interested in the business, see if any of your employees might be. Often, the most logical buyer is a competitor, but this type of sale can carry emotional weight.

At this stage, it’s important to be honest about whether you truly want to retire from the business, or if you’re just tired from navigating the recent crisis.

If you think you may still want to participate, Buchanan says it may make more sense to keep the business but put a management team in place to take on more of the daily operations. “This would give you an income stream, allow you to step back from the complex day-to-day, and yet remain involved as you transition to retirement more gradually.”

Action tip: Think about your legacy and what you want next for your business. Is what happens to the business in 10, 20, or 30 years important to you?

4. How might today’s circumstances affect your decision?

Today’s business environment is unique and might affect both a potential sale and your quality of life living in retirement.

For instance, the Federal Reserve says it will keep interest rates at historic lows. This can make it easier to finance deals like a sale. But it can also affect the yields and returns on the investments typically associated with a retirement portfolio.

Retiring as a small business owner is a complex decision. You’re deciding the future of the business you built while also deciding your own future. Try to be as honest as possible and don’t be afraid to consult with a professional.