What Will Happen to Your Business When You Retire? How to Exit Successfully and Thrive in Retirement

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Retirement looks very different when you're a business owner rather than an employee. For employees, retirement is a clear line in the sand: One day you're working, the next day you're not.

But for owners, stepping away can feel like deserting the cause, abandoning the team or even losing part of your identity.

That's why exit planning is not just about money — it's about meaning, legacy and risk management. You need a plan, and you likely need advisers to help with the plan. Just make sure they don't exit their business before you do.

Defining retirement

When you retire as a business owner, you may feel you're walking away from something you built, nurtured and sacrificed for. And the money angle can be challenging as well.

A positive is that business owners can choose to keep some or all of their equity, stay on in an advisory role or phase out gradually. Retirement doesn't have to mean disappearing overnight. But that also gives it a layer of complexity.

For many owners, the subliminal meaning behind the question "When will I retire?" is "When will I become insignificant?" That's a hard feeling to accept, but it underscores why planning matters.

Retirement isn't just about leaving — it's about ensuring your business continues to thrive without you, and you continue to thrive without your business.

Positioning retirement in financial terms

You've spent a lifetime paying in — through business capital, 401(k) contributions, Social Security and reinvested profits. Retirement is the moment you shift from accumulation to decumulation. You're not paying in — your business is paying out.

The payout can come in two forms: Income and capital. On the income side, at some point, you'll start drawing Social Security and tapping retirement accounts.

It gets more complicated when business equity is part of your decumulation strategy. If your equity is tied up in the company, you'll need a plan to convert that capital into retirement income.

And positioning for decumulation takes time. You don't want to risk being forced into a rushed or undervalued exit. Without this kind of planning, you may find yourself asset-rich but cash-poor and unable to fund the retirement lifestyle you've envisioned.

Another financial issue is that a business owner's retirement income plans often conflict with their legacy plans. Every retiree wrestles with questions of legacy, but for business owners — especially those with family businesses — the stakes are higher.

Whether by sale or gift, passing the business to children or relatives can create tension. Some may want to continue your legacy, while others may not.

Further, your business may be a cornerstone of the local economy. Walking away can feel like letting down employees, customers or the community.

Your exit plan will need to factor in how to hand off and continue the culture and spirit of the company without you at the helm. This transition often includes financial investments and commitments that will ensure the continuation of the business.

Vendors will need to be informed and comforted, creditors will want reassurance, and staff need to be motivated to carry on.

Derisking your retirement

Retirement should be about security, not uncertainty. It's admirable to be a risk-taker in business, but it's folly to be a risk-taker with a retirement plan. Derisking means reducing exposure to financial, operational and personal risks.

• Financial risk. With retirement coming your way, you should diversify assets so you're not overly dependent on the business.
• Operational risk. You can maximize the value you receive from your business by ensuring that the company can run without you. Rather than running the business down to minimize expenses, it may be more profitable to take steps to secure strong management, create up-to-date systems and formally install succession planning.
• Personal risk. Retirement is more than an event — it's a journey. Protect your health, nurture your relationships (particularly at home) and create peace of mind by planning for a smooth transition.

The professional advice challenge

As a business owner, you may have two advisory teams: One that works with your business and one that works with your personal and family accounts. When you exit your business, who will you look to for advice?

Some of your retirement income may still be coming from your business transactions, but much of your capital may be moving from business equity to personal investments. How will you transition into a new, coordinated team?

Here's another twist. Retirees are often frustrated with losing trusted professionals just when they need them most. You retire and then find that your doctor, dentist, accountant or lawyer retires at a similar time.

If you're a business owner who is planning to retire soon, you can't afford to have your advisers check out when you do.

A key requirement should be that your business and personal advisers have their own exit plans. Do they have a bench of staff who can work with you if your trusted adviser retires? Have you met these successor advisers?

Practical steps toward your exit

Open up to others about your plans. Decide whether you'll keep, sell, retire, phase out or stay involved with your business. Communicate these intentions with family, partners and advisers.

Get a professional business valuation to understand what your company is worth. This is essential for sale negotiations, estate planning and retirement projections. It's also a reality check to make sure your retirement strategy will work.

Examine your business structure (LLC, corporation, partnership) to ensure it aligns with your exit goals and tax strategy. An entity change may be in order a few years before retirement to help facilitate a transfer to others.

Create an exit plan. Develop a clear road map for how ownership will transfer — whether through sale, succession or liquidation.

Integrate your business exit plan into your broader retirement strategy, ensuring income streams are secure and you have a way to convert a key asset that is likely illiquid and undiversified (i.e., your business) into a source of retirement income.

And finally, align everything with your estate plan to protect heirs, minimize taxes and preserve your legacy.

Exit planning is about ensuring continuity, protecting wealth and honoring legacy. The question isn't simply "When will you retire?" but "What will happen to your business, your family and your future when you do?"

Done right, exit planning transforms retirement from a question of insignificance into a chapter of meaning, where your business, your wealth and your legacy continue to thrive.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.