The final act: Transitioning ownership

“I don’t want to retire. I always want to have a hand in it because I love it. I really enjoy what I do. I just want to take more time to travel and do what I like to do.”

This above statement, made by a man who works in the construction industry, sums up the attitude of many business owners when pondering the necessary task of transitioning ownership and/or finding a buyer upon retirement.

The task is one of six pillars identified in MassMutual’s 2018 Business Owner Perspectives study, but it ranked last in terms of importance and priority. That’s more alarming than surprising because nearly half the business owners surveyed don’t think about retirement or can’t imagine ever retiring.

However, as MassMutual notes, the more important issue is not when business owners will retire, it’s will they be able to fund that retirement when the time comes?

More than half (56 percent) of business owners who responded to the survey are extremely or very confident in their estimated retirement income, and they claim to have diverse income sources for retirement, including personal savings and investments, retirement accounts, Social Security, income from the business, proceeds from the sale of the business, real estate, pension plans, non-qualified deferred compensation, and even work outside the business.

However, the reality is that three out of four business owners have less than $500,000 saved in their retirement accounts and therefore underestimate their financial reliance on the business post-retirement. Those who don’t save enough are forced to rely on the proceeds from the sale of the business or continue to receive income from the business to fund their retirements. The resulting lack of financial independence can prevent a business owner from truly exiting the business.

Exit strategies

Tim Powers, president and CEO of MassMutual Wisconsin, notes that the business often is the largest asset for the business owner, but they forget to diversify. “The study mentions that 75 percent of business owners have less than $500,000 in their qualified accounts or their retirement accounts, and so they are just betting on the business,” Powers states. “Again, if they did some planning, a buy-sell agreement is in place, and they got their personal financial documents in place, as well — hopefully when working with a trusted advisor — they would divide up a variety of assets and not count solely on the business being sold.”

To put in context how a business owner’s lack of adequate retirement income planning can impact his or her exit from the business, MassMutual offers the following “Business Owner Hierarchy of Involvement” and the percentage of business owners who expect to fall into each category:

  • 24 percent exit with no ties.
  • 34 percent act as a “silent partner.”
  • 17 percent exit but still earn a “consulting fee.”
  • 25 percent stay active indefinitely.

MassMutual summarizes each option as follows:

Exit with no ties. This strategy is generally best, according to MassMutual, because the owner exits all day-to-day ownership and management of the business and allows the next generation of leadership to take over with full autonomy. It implies that the outgoing owner is financially solvent and not reliant on the business for income.

Act as a silent partner. A temporary role can be effective in many situations because it allows the outgoing ownership to gradually phase out of the business by staying involved for a predetermined period of time, usually no more than three years, and serve as a mentor to the new ownership team. In return, they are reasonably compensated for the value they bring and the seamless transition they are helping to facilitate.

Exit but still earn a consulting fee. This strategy is generally better for the outgoing owners because they hand the reins of the business to the new ownership team, but due to a continued financial reliance on the business, they never truly let go. They receive income from the business in perpetuity, and the compensation is tied more to their financial needs in retirement rather than to the value they bring.

Stay active indefinitely. This is not an ideal strategy for the owners or the business, notes MassMutual. Under this scenario, there is no plan in place for ownership to change hands. This means the business may never realize an infusion of fresh ideas and leadership, and it implies that the current owners are financially tied to the business until they die. Often times, there is no one left to take over when ownership is forced to change hands.

Some of the above scenarios are to be avoided because of the unfavorable family dynamics they bring. Financial advisor J.P. Aime, president of Focal Point Financial Strategies, works with generational businesses in which mom and dad haven’t actively worked in the business for a while, yet they are still on the payroll. This can pose some challenges. “As the successor generation, paying mom and dad into perpetuity while they are no longer involved in the business can sometimes create some ill will,” Aime notes.



Aime’s associate at Focal Point Financial Strategies, financial advisor and CEO Andrew Klein, notes the different transition objectives based on different sales targets. The goals will be different if you’re selling to a family member as compared to an outside buyer. “With a third party, outside the family, you’re going to try to get every dollar you can,” he explains. “Selling it inside the family or to somebody that’s in the business, you’re probably going to want to work with them and be more flexible on your terms.

“At the same time, you’re putting your retirement income, and the way you want to retire, at risk if you give them some sort of discount.”

For those who want to retire but stay in the business at some level, Aime offers no blanket advice. “It comes down to what’s going to be the most equitable for all parties,” he counsels. “Every case is different. In some cases, the successor generation looks at it and says, ‘You know, I want mom or dad to be around.’ If you’re a key manager, you might want your mentor to be around so that you can bounce ideas off of him or her, and if they are willing to be a consultant, the successor is willing to pay for that.

“In some cases, [the successor] is ready to cut ties completely and doesn’t want any outside influence. They want to get behind the wheel and run the show. The question that we ask a lot is: If you turn it over to your key manager or to your kid, and you were on the payroll when they tanked the business, would you be okay financially?”

Building enough runway

If you diligently prepare your business for sale, it’s going to be attractive in any buying environment, notes Nathan Brinkman, president of Triumph Wealth Management. When people don’t put in the appropriate time, effort, and resources into the business or a transition, they often walk away from a deal with regret. It’s avoidable, he says, but many people don’t give themselves enough runway to make an appropriate landing.

“It will make it easier if you put it into the open market or if you do an internal sale, but certainly for unique businesses, finding and developing partnerships or relationships would be critical in terms of who to transition it to,” he states.” This is just one of those where if you do everything else right, this becomes a lot easier.”

Brinkman’s last piece of advice is for transitioning business owners who wonder about what they will do next. “That’s a great question to ask because if you don’t prepare yourself for life after business, you’re just not going to make the same decisions,” he notes. “It’s a good idea to find other things to do or follow a passion or an interest. A lot of people have developed very successful businesses, but that doesn’t mean it’s their passion.

“They might have a passion for other things, and if they have a lot of life left, they might want to pursue that passion. There is nothing holding you back from doing it if you can financially afford to.”

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