According to a study by Exit Planning Institute, 70% of owners in 2023 indicated they needed to harvest the value of their business to support their lifestyle post-exit. The same study also concluded that 84% of owners indicated their company must remain profitable (54% said it was critical and 30% said it would help) for a successful transition and secure financial future.

Why are these statistics so alarming? Unfortunately, it’s perilous for many business owners to depend on selling their businesses for a secure retirement.

Let’s explore five of the reasons:

1. Business failure rate: According to 2024 data from the U.S. Bureau of Labor, 65.3% fail in their first 10 years, 75.3% in 15 years and 80% in 20 years. The odds are your business can have a successful run for many years and still fail before you reach retirement age.
   
   
2. Business sell success rate: Research by Exit Planning Institute also indicates that up to 80% of businesses will never sell. This is compounded by an increasingly crowded marketplace. Counselor State of the Industry data revealed that the percentage of distributors likely to sell their business increased by three percentage points in 2024 compared to 2023. Expect this to continue in 2025, since economic downturns and lagging sales often prompt owners to consider selling. Additionally, as baby boomers age and prepare for retirement, the market will see a significant influx of businesses for sale.
   
   
3. Valuation expectations: Speaking of which, what if the competitive environment adversely affects the value of your business? A potential shift toward a buyers market will result in lower valuations for sellers. Do you have realistic expectations regarding the value of your business? Do you know it’s worth as time comes? Consider what the industry will be like and what the economic conditions will be.
   
   
4. Retirement accumulation: How much do you need for a comfortable retirement? Most small businesses I have spoken to don’t have the answer to this crucial question. If you don’t and you happen to depend on the sale of your business to fund your retirement, how do you know the amount you sell your business for will be enough? This is even assuming you get all the funds you feel your business is worth after fees and taxes.
   
   
5. Written exit plan: Most business owners don’t have one. According to a study by Business Enterprise Institute, 80% of business owners want to stop working in their businesses in the next 10 years, yet only 20% of owners have created written exit plans. If you are serious about maximizing the value of your business, you must have a written plan in place years in advance.

From a financial perspective, let’s discuss the road map to a successful retirement. Most business owners are time-poor, but it is imperative to make time to assemble a formidable plan. To increase the chances of this plan succeeding, include family members and other significant stakeholders in your personal and business life. You want to make sure you are on the same page to avoid any disagreements down the road.

My wife and I wrote our plan a mere four years into our new business and exited it after 25-plus years. We have a very different mindset, which, for some, might be aggressive – our financial plan has zero dependence on Social Security and the earn-out from the sale of our business. We derive our income from the investments we made in appreciating assets during the 25-plus years of running our business. (By the way, if you get sizeable Social Security checks and receive a decent price for your business, that’s just icing on the cake. It provides extra padding to do more good for your family and your community with that additional windfall).

“It’s perilous for many business owners to depend on selling their businesses for a secure retirement.”

How do you come up with your financial plan? Good question!

First, write down your retirement gap. To determine that number, see where you are financially at this point of your life and where you want to get. In other words, what is your net worth (total net assets minus total liabilities), and what must it be when you are ready to hang it up. How much do you need at the time of retirement? That depends on your lifestyle, health, obligations, where you live, age, whether you plan to continue working and many other factors. Keep in mind that life expectancy is on the rise with advancements in healthcare, which means your funds need to last longer.

One of the most popular and widely accepted rules for retirement budgeting is the 4% rule. The 4% rule suggests that a retiree should be able to withdraw 4% of the balance in their retirement account(s) in the first year after retiring and then withdraw the same dollar amount, adjusted for inflation, every year thereafter for approximately 30 years.

Some common steps that need to be taken are:

• Optimize and cut out unnecessary expenses.
  
  
• Examine your “nonproductive” debts closely and take steps to pay them off as quickly as possible. (Nonproductive debt is borrowing money to buy items that lose value with time, such as cars, boats and similar depreciating toys.)
  
  
• Make sure you pay yourself a “fair” salary that you would pay somebody to replace you. This is necessary to get an accurate financial picture of your business performance. Your salary provides you funds to invest in your IRAs. Besides allowing you to set aside and invest for your retirement years, when active income would be very low or nonexistent, it also helps mitigate your immediate tax burden. It could even put you in a lower tax bracket.

Second, grow and diversify your wealth. As you build your business, besides reinvesting some of the profits into the company, you have got to be strategic about diverting a percentage of your income toward building an asset base independent of the business. Why? If the company continues growing successfully, you will have an appreciated asset you can sell. But if it unfortunately sees an unexpected downturn, you have a safety net for you and your family.

Some of the most common investments are in equities, bonds, mutual funds, real estate, precious metals and other businesses. One of the most essential criteria must be the asset’s appreciation with time.

Third, preserve your accumulated wealth. Talk to a certified financial advisor to explore different types of insurance to protect your personal and business assets and discuss risk mitigation strategies. On an individual level, organize your life by entering all your assets, liabilities, obligations, essential records, significant numbers and other relevant information into a spreadsheet and sharing it with close family members.

For a business owner, estate planning is more than simply a will. Work with a reputable attorney to create trust documents to preserve your personal and business assets for a worry-free and comfortable life after exiting.