Retirement Planning for Small-Business Owners


The unbreakable dedication to achieving their entrepreneurial dreams that drives so many business owners to success can also cause some of the same people to overlook a key aspect of their financial future: retirement.

A 2017 survey by Manta of 1,960 small-business owners found that more than a third did not have a retirement savings plan, while another 36 percent said they planned to explore other job opportunities upon retirement from their business.

“When you are building a business, it’s very easy to keep a laser focus on the business as the only thing,” says Ryan Frailich, a Certified Financial Planner in New Orleans. “It’s really critical to constantly reassess not just the business financials but how it’s affecting your personal finances. Because if the personal side isn’t going to work, it’s going to impact your effectiveness on the business side.”

These tips can help small-business owners prepare for retirement, even when building a successful company.

Don’t Rely Solely on Your Business

Of the business owners in the Manta survey, 37 percent said they didn’t make enough profit to save for retirement, while 21 percent reported using their previous retirement savings to invest in the business.

While sacrifice among entrepreneurs is common, Frailich says forgoing any sort of personal financial planning and focusing entirely on your company is extremely risky over the long run.

“The biggest mistake I see is people reinvesting everything back into the business,” Frailich says. “They’re not diversifying because they’re using all the income they get from the business to keep growing the business. That means they’re reliant on that business as their retirement plan. It’s risky to have so much of your future tied to one thing.”

Assess What You Have

When business owners are developing a retirement plan, Frailich says, one of the first steps is to really take stock of all of their assets and how diversified they are — and not merely the assets related to the business.

“Do they have any other investments?” Frailich says. “Have they been saving for a retirement at all, and what will that do for the future they want to lead?”

Understand Your Company’s True Value

A 2015 FPA/CNBC business owner survey found that 78 percent of small-business owners said they planned to sell their business to fund their retirement. Frailich says it’s important to be realistic about whether that’s truly possible.

He notes that businesses’ market values — and therefore the potential contribution toward your retirement from selling a business — varies widely by company type. A small operation that provides a particular service may be worth next to nothing without the skills and knowledge of the business owner.

“Everyone thinks their business is worth more than the market actually thinks it’s worth,” he says. “Humans have a proximity bias: If you work in something and build it for 10,15 or 30 years, you’re probably going to value it more than someone trying to buy it.”

Frailich says getting a firm assessment of what your company is worth to someone else is an essential step in retirement planning for any business owner. That true valuation, he says, can play a considerable role into your overall approach and plan.

“When you take that into account, you can start to figure out [that] if you were to sell it what makes sense to do next,” he says. In some cases, that could include an exit or a succession plan that lets you continuing drawing income while someone else takes over the company. In other instances, selling the business is simply not a viable option to fund a retirement.

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