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Retiring from a Business You Own

By Chuck Yanikoski

There are two issues to consider: your retirement from work, and your ownership interest in the business. In personal service businesses, these sometimes cannot be separated - there may be little value to your company when you stop working. But if the business can plausibly continue without you, you could sell your ownership interest without retiring, or you could retire without selling your ownership interest.

As an owner, you may have more control over when and how you retire than the typical employee has - but you probably have more constraints as well: you are hard to replace, you can't just walk away, and you may not be able to collect much in the way of employee benefits.

If you have one or more partners, the transition into retirement will probably be a lot easier than if you are the sole owner. But in either case, you will probably need to consider the possibility of phasing out gradually, rather than leaving all at once. This means you should start planning this transition years, not weeks or months, ahead of time. And you should discuss it with everyone who is involved: other business partners, employees, clients, vendors, your landlord (if you rent space), and your family.

Ideally, you have a business succession plan in place already. If so, you are halfway toward resolving your retirement concerns. If not, you should start working on it today.

If you are retiring and selling your business, you need to figure out what your business is worth. Most small business owners either don't know or are too optimistic on this point. You may know what your business is worth to you as a going concern, but if you are planning to sell your interest, you need to know what it is worth to a buyer.

A buyer will be interested in the book value of the assets and net income of the business, but the market value can be very different from the book value - either more or less. A buyer will also want to estimate whether you have a growth business, a cash cow, a good-looking business but with a market that is drying up, a business with new potential, or one that is losing its biggest asset, namely you. There are various rules of thumb for estimating the value of a business, but you might need a professional business appraiser for a legitimate estimate. Even so, the only value that matters is what a real buyer will pay you for it, and you won't know that until you find a buyer and negotiate a deal.

You also need to consider whether your business would be worth more if you waited a while. Maybe the market is changing in your favor. Maybe a competitor is closing, relocating, or changing its focus. Maybe there are ways you could spruce up your company to make it more attractive (physically or financially), if you moved more slowly. In any event, expect it to take a while to find a buyer and then negotiate and close a deal - typically about a year for the entire process.

How do you find a buyer? Your best bet may be to look among people you already know: an existing business partner, a family member, a key employee (or a group of employees), or a competitor. Don't be too quick to dismiss these possibilities. A family member or employee might be interested in the business, but unable to pay. But if a deal is structured that enables the business to continue in operation, and the new buyer can pay you over time from the proceeds of the business, it could be a winning arrangement for all concerned.

With luck, you can advertise locally and get results, but you might need to use a business broker or investment banker. Businesses are bought and sold every day, and since you probably have not done this before, or at least not recently, you would probably benefit by enlisting the services of someone who does it for a living.

You might also want to consider alternatives to selling, such as giving your business in trust to a charity, which will then sell it to someone else. You may be able to avoid capital gains taxes that way, plus get a tax deduction. Typically, in such an arrangement, the charity will then pay you an income for life. Other kinds of trusts and special legal arrangements can also be used, including family limited partnerships (if you want to keep the business in the family). You will need expert legal help to deal with such situations, though.

All of this assumes that you are selling your business interest intact. If not, you might sell off your assets piecemeal to different parties - for example, your customer list and inventory to a competitor, your furniture and equipment to a dealer, your real estate on the open market.

When you do find one or more prospective buyers, be prepared to open your shop/office and your financial books. But before you do so, make sure that the buyer(s) are legitimate, and have both the financing and the intent to go through with a deal if they like what they see. You don't want to waste your time with an unqualified buyer, and you certainly don't want to share the details of your business operation with, say, a competitor who really just wants to see how you run things and has no intention of buying you out.

Expect to need a lawyer and an accountant to help you through the process. Even if the buyer is a family member or close friend, everything should be in writing, just as if this were not the case. Business arrangements can strain personal relationships; furthermore, one of the parties might die or otherwise become incapable of carrying through the plan as originally conceived, and someone else might end up with the responsibility - so everything needs to be in black and white.

It can be a lot of trouble, but as a business owner you are probably used to that - and retirement is just on the other side.

For more information, see my company's "Retirement Readiness" page about Work , particularly the sections on Business Succession and Business Liquidation.