How to Advise Business Owners Looking to Retire

June 23, 2016 — 9:00 AM EDT

For those of you who advise business owner clients, helping them make the transition into retirement is a crucial part of your relationship with them. Ideally this process began a number of years ago when you took this client on. Hopefully they have a retirement plan (or plans) in place that have been funded and they have an exit strategy in terms of a succession plan or a buyer for their business.

Sometimes things are not ideal and you are called upon to step in later than you’d like to help them make this transition. Perhaps you are the first financial advisor that the client has used, perhaps they were not able to do the type of planning needed previously or any number of other reasons. (For more, see: Plans the Small-Business Owner Can Establish.)

Here are some things to be aware of when advising business owners looking to retire. Even if these are outside of your areas of expertise you can serve as the client’s quarterback in working with other business advisors with specific expertise in this area.

Help Define Succession Goals

What is your client looking for in terms of the future of their business? Are they looking to sell and use the money as part of their retirement nest egg? Do they want to pass the business on to the next generation of their family? Are there non family member employees or partners who can buy the owner out? Or is the best option to close the business and perhaps sell some or all of the assets?

For many small business owners their company is a large part of their identity. They’ve devoted significant amounts of time, energy and often money to making a go of it. Additionally, they likely want to ensure that their employees and customers are taken care of and that the business carries on as their legacy. (For more, see: RIAs: How to Talk to High-Net-Worth Entrepreneurs.)

Prepare Business for Sale

This includes ensuring that the business can run effectively without the owner. This may mean that your client will need to begin to transition their management and decision responsibilities to other senior managers within the company. If your client’s company doesn’t currently have this level of talent they may need to go outside and hire the right people.

They will also want to have a professional valuation of their company. This will help when working with a business broker or a private equity firm. Any potential buyer will want a professionally prepared set of financials to help them evaluate the profitability of the business as well as key balance sheet items.

Depending upon the nature of the business and other factors, the buyer may want your client to stay on for a period of time during the transition. Their objective may be to have them smooth the transition with clients and/or to help train the new owners/managers. If this is the case the duration of this arrangement, what is expected of the client, continuation of benefits (if applicable) and any compensation need to be clearly spelled out. (For more, see: Retirement Plan Options for Small-Business Owners.)

Prepare Family Members for Transition

If there are family members already in the business, your client should begin the process of identifying who will run the business and which family members will be involved. If this is the direction that your client decides to go, there are a number of issues to work out. They include:

  • How will the client be paid for the value of the business? The next generation might not be able to raise the cash needed so an arrangement to pay your client over time out of the cash flow of the business might need to be established. Can the business support this and continue to grow and prosper?
  • Will choosing one or two family members (presumably the client’s children or other close relatives) create a family rift?
  • How will the client “even up” their inheritance to heirs not involved in the business?

Ideally the client can use their business plus other assets to accomplish their retirement, succession and estate planning goals. This is a complex issue and with your help, and likely that of an estate planning attorney who understands these issues, you can help your client pass the business onto the next generation if this is their goal. (For more, see: Advising FAs: Explaining Estate Planning to a Client.)

Liquidating the Business

If there are no family members willing or able to continue to run the business or there are no desirable options to sell or merge the business as a going concern, then liquidation might be the best option for your client. Depending upon the nature and type of business that is involved, the sale of some or all of the assets might bring in a substantial sum for your client. For example, if this is a manufacturing business there might be specialized machinery or equipment that has value. Perhaps the inventory could be sold or if the client owns the facilities, the buildings and the real estate may have significant value in a sale. In many service businesses the client list can be valuable to a competitor.

Pulling it Together

Helping business owner clients move into retirement can have its challenges for financial advisors. All too often business owners neglect their own retirement and plow extra money back into their company. As their financial advisor you can help them look at the big picture. If they don’t have one in place be sure to get them to start and fund a retirement plan and to invest outside of the business. This will ensure they have a nest egg in place in addition to whatever their exit strategy from the business might generate. (For related reading, see: How the Self-Employed Can Prepare for Retirement.)

While many business owners have an idea of what their exit strategy might look like, too few do anything to set their strategy in motion. Whether this means getting the business ready for sale, grooming a successor or having an attorney get things in order it is important that you have these conversations with your client in advance of their anticipated retirement.

The Bottom Line

For business owner clients their business is likely their biggest asset. Helping them convert this asset into a vehicle to fund their retirement takes planning and you can provide critical advice here. In addition, you can play a key role in helping them establish other retirement savings vehicles as well. (For more see: Retirement Planning for Small Businesses.)