- Never assume the value of your business will provide enough for all your retirement goals.
- “Lifestyle creep” can eat up your discretionary income and derail your long-term financial and retirement goals.
- Ongoing planning, realistic budgeting, and sensible savings will allow you to live a comfortable lifestyle while you’re saving for retirement.
My last post, Preparing Your Business (and Yourself) for a Smooth Exit, discussed a wide variety of issues to consider as your business matures and you start looking toward your future. Every entrepreneur is different. There are many ways to approach this important crossroad in your life. Some owners are so passionate about their businesses and intend to work as long as they are physically and mentally capable. Others plan on selling their business sooner as part of an overall retirement plan.
Chances are you are somewhere in between. Regardless of your timeframe, you need to develop a plan that carefully considers the eventual transition of your business and what that transition means for you and your family. Hint: finances are just part of the equation.
When working with our entrepreneurial clients on their long-term financial plans, I remind them NOT to assume that the sale of their business will cover their entire retirement needs. The majority of owners don’t receive the actual selling price they imagined for their business. There is no way of knowing in months, years, or decades all the factors that could impact the valuation of a business. An ever-changing competitive landscape combined with evolving technology and unpredictable economic considerations are just some of the factors that can impact a business in the future, both positively and negatively. Again, you must have other sources of assets, savings, and retirement income than just your business.
Don’t Wait Until the Last Minute to Start Planning
I don’t have to remind you that building a business is exceptionally hard work. It takes commitment, determination, and tremendous financial sacrifices to get to a point where your income finally matches the effort you put into the business. Many owners never reach this inflection point, but if you have – congratulations on that achievement! At this point in a business lifecycle, it’s not uncommon for owners and their families to experience “lifestyle creep.” As you start to enjoy the fruits of your labor, your spending increases as your disposable income grows. Things that used to be indulgent luxuries now become necessities for you and your family – that’s just human nature and part of the entrepreneurial journey. Take some time to reward yourself and those who stood by you from the beginning. At the same time, you should focus on setting aside some of your hard-earned income for the future.
Exit Planning: Not a One and Done Exercise
You’re at the point in your life that it becomes imperative to start committing yourself to exit planning that is thoughtful, proactive, and nimble. If you don’t focus on setting aside money for the future, your spending on vacations, second homes, cars, and other luxuries can rapidly eat up your savings. Also, it’s surprising how quickly you and your family become accustomed to your new higher standard of living. Just remember, your current lifestyle may not be sustainable during retirement and it is very difficult to dial back your spending once you have become accustomed to a higher income.
It may surprise you that our firm has never developed a financial plan “booklet” for our clients after all these years. The reason we don’t is that life circumstances change all the time. The minute that booklet is published, it becomes obsolete. Instead, we emphasize an ongoing commitment to planning because life, business, and personal goals are always changing. We have found it far more effective for all clients, particularly business owners, to evaluate their goals and current situation on an ongoing basis. With regular monitoring, you can make proactive adjustments to your plan, especially when things don’t go as expected.
Work with a Professional When Selling Your Business
In my next post, I will look at different ways to sell a business and how the proceeds may or may not be enough to sustain your current standard of living through retirement. If you or someone close to you is contemplating a sale or transition of their business, please don’t hesitate to contact me. I’m happy to help.
Todd Flynn, CPA, CFP ® is a principal at Soundmark Wealth Management, LLC. Todd works closely with physicians, business owners, and other successful and accomplished individuals to help them define their financial goals and implement an ongoing financial planning process.