By Nate Wenner

Do you own a business, the lifeblood of employment in our economy? Wonderful! Is the expected future value of your business a primary part of your personal retirement plan, or are you postponing other retirement savings or even planning for retirement until you can find enough time?

The life of a business owner is certainly a long and busy road. Every day, you must accomplish necessary, time-consuming tasks to build and strengthen your business, including developing customer relationships, handling employee issues and managing cash flow. Your business is likely a focal point of your life.

Unfortunately, most business owners often neglect their personal financial goals. It's more common for owners to put off planning for their financial future until later in life when "things settle down," or when they discover that it's time to start planning for an exit from the business.

Let's focus on two phases in the life of a business owner: the pre-retirement years, in which they're primarily focused on managing the business; and the years preceding their exit from the business. Both phases are critical, but for different reasons, and they come with different priorities, too.

There are some common roadblocks to prudent planning in the first half of the life of a business.

The business owner must play numerous roles in the company to keep everything afloat. He or she often has well-defined goals and big dreams for the business, but is inundated with an endless list of tasks and limited time to accomplish them all. Lack of time often causes business owners to fall prey to one of two outcomes:

  • They fail to create a defined plan for their family's financial future. It can be risky for business owners to make decisions on their own without sufficient information or solid analysis. But without adequate time or experience, owners may make an expedient decision, which can lead to regret down the road.
  • Sometimes, owners don't take action at all - while they're focused on strategizing for the future growth of their business, they wind up missing out on opportunities to grow or protect their family's financial situation.

What is the solution? Prioritizing some key issues at various stages of the business lifespan could be beneficial.

Set Personal Goals

As a business owner, you should establish and periodically reset your personal goals in the same way you put together multi-year business plans. A critical step is determining what is reasonably possible to achieve, given your financial circumstances. Starting a conversation that involves both key family members and business advisers is a good start.

Experienced advisers can be great listeners and guides in this endeavor. There are also tools and technology that can help you articulate goals and compare various strategies, as well as the trade-offs or implications associated with them. Taking the time to explore what is truly important to you and what you really want (involving your spouse and possibly other family members) can be valuable, so you can focus on potential paths that might be appropriate.

Choose a Qualified, Credentialed Adviser or Planner

Many business owners would benefit from the guidance and assistance of an appropriate adviser. However, it's important to ask the following questions before you start your search:

    Is the adviser an expert in working with business owners?

    Can this adviser or team help me plan and navigate all issues regarding the most critically important event of my life -- the eventual sale or transition of my business?

    Does the adviser have a fiduciary responsibility to put clients first, with no compensatory conflicts of interest?

    Advisers (financial advisers included) are not created equal, so it's important to be diligent and practice caution before you entrust somebody with the management of your affairs.

    Invest in the Business: Manage Cash and Debt Levels

    These tasks are of the utmost importance for "young businesses" that are just getting off the ground. External demands on a business owner's financing situation are endless, so it is critical to monitor expenses and conserve dollars to finance the operation.

    Pay yourself: Don't forget to invest in yourself. Business owners often give themselves very little in the way of salary, partly due to the reasons mentioned above, and also due to the need to minimize personal payroll and income taxes. While these actions can be a big help at tax time, they can also be roadblocks to helping business owners accumulate savings for retirement or other goals. It's imperative for even the most optimistic entrepreneurs to be honest and realistic with themselves. You have probably heard the statistics on the relatively low percentage of businesses that will survive and thrive in the long term; don't solely rely on your business's success to define yours.

    You should also set up regular automated payments to your savings to accumulate enough money to fund your personal hopes and dreams (such as a 401(k) plan). To some extent, it's OK if this saving takes place in spurts. However, you should aim to set aside a certain amount each year. Of course, the hopes and dreams of many business owners include the potential of selling their business to fund their retirement. And yet this is an unknown for most businesses, and dreaming of a big payoff from the sale of a business may not be realistic for everyone.

    Diversify your assets: As you save and invest money for the future, ensure that it is properly diversified and compatible with the amount of risk you are willing to bear. Expand the universe of your investment dollars. Understand and accept that investing outside of your business means that you are increasing the opportunity set. Let those markets work for you, even if you don't have the level of control in your portfolio as you do over your own business.

    Don't fall prey to "market timing." Determine an investment policy and execute and adjust it carefully, in a disciplined way. Then, spend most of your time and effort on managing your business and reassessing your goals and pathway periodically.

    Manage risk: Beyond their monetary investments, it's essential for business owners to establish protection for their families. Life insurance and buy-sell agreements, which deal with the buyout of a deceased partner of the business or other future equity transactions, can safeguard your family in the event of your death or in case there are changes to the business structure. Also, disability insurance or business continuity insurance may be advisable, especially in the early to middle years of your business.

    Plan for retirement needs: Determine how much money it will take to fund your retirement or second-career dreams. Tracking or paying close attention to personal expenses, as opposed to business expenses, can be accomplished with the help of online tools or a spreadsheet.

    Develop a solid understanding of how your cash flows will play out once you move from the asset accumulation phase into decumulation, which is the use of income from or even the principal amount of those investment dollars.

    Plan for taxes: Taxes play an important role in retirement income planning. Tax-smart income generation, and the drawdown of your portfolio, is a whole new ballgame compared to tax-efficient accumulation investing. It's important to seek good investment advice and management throughout this phase to ensure you don't overpay taxes and that your nest egg can be sustained for decades.

    Plan for life after the business: Of course, your business is much more than just a career or a source of income; it's your livelihood. While it may be hard to imagine a future that includes selling or leaving the business, it's very important to keep the issue of succession planning in mind. Getting the most out of your business or real estate investment later on can help guide your personal wealth management decisions after you've left the helm.

    There are a few important factors to keep in mind when preparing for your eventual exit. The second part of this article focuses on the most common exit routes, which all owners should know as they move through the business lifecycle.

    Choose Your Exit Route

    While the number of exit routes may seem unending to you, there are generally eight to choose from:

    • Transfer the company to a family member
    • Sell to one or more key employees
    • Sell to employees using an Employee Stock Ownership Plan (ESOP)
    • Sell to one or more co-owners
    • Sell to an outside third party
    • Engage in an Initial Public Offering (IPO)
    • Retain ownership, but become a passive owner
    • Liquidate

    While emotions can cause the exit process to be overwhelming at times, the decision-making steps can be relatively straightforward. First, you must establish personal and financial objectives to identify the best buyers of the business. Second, you must determine the value of the company. And again, the tax consequences of each exit path need to be evaluated.

    Let's take a closer look at each option.

    Owners who consider transferring their businesses to family members usually do so for non-financial reasons. Advantages to this route include:

    • Transfer of the company to a known entity;
    • Provides for the well-being of the owner's family;
    • Perpetuates the company's mission or culture; and
    • Allows the owner to remain involved in the company.

    There are several disadvantages to this route as well, primarily:

    • Little or no cash from closing is available for retirement;
    • Increased (and continued) financial risk;
    • Owner's involvement in the company is required post-closing;
    • Children's inability or unwillingness to assume the ownership role; and
    • Family issues that surround treating all children fairly or equally.

    Transfer to a key employee(s): The owner who considers this type of transfer hopes to achieve the same objectives as the owner who is transferring to a family member:

    • Transfer of the company to a known entity;
    • Perpetuates the company's mission or culture;
    • Allows the owner to remain involved in the company; and
    • Provides financial security, albeit potentially over time.

    The disadvantages of this exit route are also similar to those present in the family transfer:

    • Little or no cash from closing is available for retirement;
    • Increased (and continued) financial risk;
    • Owner's involvement in the company is required post-closing; and
    • Employees' inability or unwillingness to assume the ownership role.

    Transfer to key employees via an ESOP: ESOPs are qualified retirement plans, which must invest primarily in the stock of the sponsoring employer. In addition to the advantages of a standard transfer to key employees, the owner who uses an ESOP to transfer a company to key employees also enjoys beneficial tax treatment as well as cash at closing. Not all aspects of this exit route benefit the owner, namely:

    • Cost and complexity of the ESOP;
    • Limited company growth due to borrowing necessary to purchase the owner's stock;
    • Less than full value is received at closing (compared to a third-party sale);
    • Company assets are used as collateral; and
    • Key employee ownership is limited.

    Sale to co-owners: The advantages to this type of sale include:

    • Transferring the company to a buyer whose commitment, skills and knowledge are known quantities;
    • Perpetuating the company's mission or culture; and
    • Allowing the owner to remain involved in the company.

    The disadvantages of the sale to a co-owner are:

    • The need to typically take back an installment note for a substantial part of the purchase price;
    • Increased financial risk;
    • Owner's involvement usually continues post-closing; and
    • Less than full fair market value is normally received.

    Sale to a third party: This exit route offers an owner the best chance at receiving the maximum purchase price for his/her company. Additionally, the owner who engages in a sale to a third party is best- positioned to receive the maximum amount of cash at closing. The route appeals to owners intending to leave after they sell, as well as owners who want to propel the business to the next level with someone else's financial support. Advantages include:

    • Achieving the maximum purchase price;
    • Receiving substantial cash at closing;
    • Allowing the owner to control the date of departure; and
    • Facilitating company growth without substantial owner investment or risk.

    Disadvantages include:

    • Potential loss of the owner's personal identity;
    • Potential loss of the corporate culture and mission;
    • Potentially detrimental to employees if sold to a party that is seeking consolidation; and
    • Depending on the sale structure, part of the purchase price may be subject to future performance of the company after it is sold.

    An IPO: The IPO exit route is one that attracts business owners for two reasons: high valuation and cash for the business. Unfortunately, the IPO is not without significant disadvantages, primarily:

    • Limited liquidity at closing;
    • Not a full exit at closing;
    • Loss of full control;
    • Additional reporting and fiduciary requirements; and
    • Company needs to be very large (over $250 million at least) for an IPO to be an appropriate exit option.

    Assume passive ownership: This route attracts owners who wish to:

    • Maintain control;
    • Become less active in the company; and
    • Preserve the company culture and mission.

    The owner is disadvantaged, in that he/she:

    • Never permanently leaves the business;
    • Receives little or no cash when he/she leaves active employment; and
    • Continues to experience risk associated with ownership.

    Liquidation: There is only one situation in which this exit route is appropriate: the owner wants or needs to leave the company immediately and has no alternative exit strategies in place. Liquidation offers speed and cash; however, the disadvantages to this route are enormous:

    • Liquidation yields less cash than any other exit route;
    • The tax burden is higher than any other type of sale/transfer; and
    • Liquidation can potentially have a devastating effect on employees and customers.

    Given these disadvantages, few owners pursue liquidation unless they have no alternative.

    In determining the best exit option, you should carefully compare the advantages and disadvantages of each path in relation to your specific objectives. Engaging experienced advisers to assist in this process is valuable, as they can provide guidance, examples and market perspective to help achieve the optimal result.

    Arranging Your Personal Estate

    Regardless of age, business owners should meet with a qualified attorney and estate-planning specialist to ensure that their goals and wishes are properly accounted for, including plans for business assets. Younger business owners don't always feel that estate planning is necessary; but failing to make a plan could put their business and family at risk. At a minimum, business owners should have an updated will that contains instructions on how their assets should be distributed, which may or may not include business assets.

    With a lot of hard work (and a little luck along the way), you can overcome the challenges you face in your business and take steps toward future growth. But don't forget to get on track, and stay on track, to achieving your personal financial goals throughout that process. In the end, you are much more than your business. Hopefully, you will help your business attain the goals you have set for it, and it will help you attain your own.

    About the author: Nate Wenner, CFP, CPA, PFS, CIMA is a principal, regional director at Wipfli Hewins Investment Advisors. Hewins Financial Advisors, LLC d/b/a Wipfli Hewins Investment Advisors, LLC ("Hewins") is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Hewins is a proud affiliate of Wipfli LLP. Information pertaining to Hewins' advisory operations, services and fees is set forth in Hewins' current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at The views expressed by the author are the author's alone and do not necessarily represent the views of Hewins or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Hewins, and Hewins does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Hewins of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional. Hewins does not provide tax, accounting or legal services.