SIMPLE STEPS for Exiting

Your Business

CHAPTER 2Retirement Planning

CRN201712-213383

Disclosure

The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

Retirement Planning

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FACT Many business owners’ retirement plans are contingent on the business’s continued success.

78 42Of a business owner’s

wealth is tied up in the business1

Plan to sell their businesses to fund their retirements!

Have no retirement assets outside of their businesses3

80 % % %

How are business owners funding retirement?

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I plan to sell the business and use the money from the sale to retire/or help retire.

51%

22%

17%

I have invested in a retirement savings plan, such as a 401k or IRA.

I plan to retire and keep receiving income from the business, even though I am no longer

working for/in the business.

My spouse has saved enough for retirement for both of us.

I don’t know.

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$#

Is it enough?

Are you comfortable with the business as your

retirement plan?

Is it enough?

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81%

STAGGERING STATS about business owner retirement savings:

55%

68%

Save $25,000 or less annually for retirement

Aged 45-64 have retirement savings of less than $100,000

Estimate their business value at less than $500,000

LET’S DO THE MATH…

Is $600,000 enough to provide 10, 20, or even 30 years of retirement income?

When the Business is the Retirement Plan

Your children are willing to pay you a salary until the day you die,

The new owners run the business successfully so they complete the

installment buyout.

YOU BETTER BE CERTAIN:

you may be forced to:

! Delay retirement (or never truly retire)

! Come back into the business after retiring (perhaps to rescue the business)

! Accept a lower standard of living

OTHERWISE or

or

You receive the full value of the business at the time of sale,

Though it may be your largest asset…

…your business should NOT be your entire retirement plan.

The “golden rules” of retirement planning

! HAVE a clear picture of what life looks like in retirement

! DETERMINE the income replacement value of your business

! UNDERSTAND how your exit strategy could impact your retirement income

! KNOW the retirement savings vehicles available outside of your business

! DOCUMENT your roles and responsibilities in the business post-retirement if you plan on continuing to receive income

Have a clear picture of what life looks like in retirement

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Most business owners say they plan to “retire”, but when?Most business owners say they plan to “retire”, but when?

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Retire

Travel

Charitable activites

Start another business

Work for someone else

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%+#

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What business owners plan to do when they exit the business

Have a clear picture of what life looks like in retirement

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Most business owners say they plan to “retire”, but when?

When business owners plan to retire

20%

35%

26%

19%

80%

Plan to retire in next 5 years.

Plan to retire someday.

Will probably retire someday, have not given it much thought.

Can’t imagine will ever retire.

Have no idea when they plan

to retire.

20%

Plan to retire in next 5 years.

+ + =

Have a clear picture of what life looks like in retirement

Business owners must have a plan for “letting go” of the business.

! Define what it means to have a “successful retirement”

! Put together a written “re-engagement plan”

! Develop a realistic plan to achieve financial independence

! Communicate the specifics surrounding your exit to family and key employees

! Let your successor do things their own ways

Tips for “letting go” of the business:

Above all else…set a date and stick to it!

Business valuation and retirement planning

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I/My partners would do it

42%

32%

27%

My CPA/Accounting firm would do it

I would use a business valuation service company

Business owners under or OVER VALUE their businesses by as much as 59%**

About half of business owners (59%) say they’ve had their business valued, but not really:

Who is doing the valuations*:

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Business valuation and retirement planning

There are many different approaches to valuing a business:

! Book value

! Market value

! Capitalization of earnings

! Discounted cash flow

! Asset accumulation

! Liquidation value

! Income replacement value

Determine the income replacement value of your business

How much personal value does the business owner realize from the business in the form

of compensation and other benefits?

! Salary

! Other company paid benefits not listed above (stock options, etc.)

! Rent paid to owner’s real estate entity

! Company paid car, travel, meals, etc.

! Employee benefit programs (insurance)

! Pension, profit sharing, etc.

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

Determine the income replacement value of your business

Book value

How do you fund the gap?

Income replacement value is about what you need the business to be worth vs. what you think it is worth.

Income replacement value

Determine the income replacement value of your business

As soon as you are making a profit, start saving money outside the business.

Profit 20 15 10 5 Exit

Income replacement value

Savings

Owner's estimated value

YEARS TO EXIT

Determine the income replacement value of your business

A personal financial plan can help to determine the right amount of savings to meet your retirement goals.

! Expected annual spending in retirement

The amount of savings required for retirement depends on a variety of factors:

! Expected retirement age

! Expected lifespan

! Inflation and investment returns

! Funds available from other sources, such as Social Security, and other pensions and inheritances

! Future health-care costs

How will your exit strategy impact your retirement?

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Third party sale

Sale to employees

Transfer to children

Close the doors

Sale to private equity

ESOP

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How are business owners planning to exit their businesses?

How will your exit strategy impact your retirement?

FOR EXAMPLE,consider these questions:

Will your chosen exit strategy shrink or widen

the retirement savings gap?

Transition to the next generation

! Do they have enough cash to buy you out immediately or will it be an installment buyout?

! What are the terms of the buy-out?! Will they be as skilled as entrepreneurs as they were as employees?

! Will it be a non-cash transfer?! Will they allow you to stay on the payroll post-retirement?! Can they continue to run the business successfully when you are gone?

Sale to employees

Sale to a third party! How many years will it take to find a ready, willing and able buyer?! Can you be patient waiting for the right buyer to come along?! Are you confident you will get the full value for the business?

OR, HAVE YOU NOT EVEN DETERMINED YOUR EXIT STRATEGY?

Know the available retirement savings vehicles

First, think about what you want out your retirement savings vehicles?

! Do you want to offer a retirement plan to your employees, as well?

! Are you looking for ways to attract, retain and reward your top talent?

! Are you looking for the plan contributions to be tax deductible to the business?

! Are you looking for tax deferred growth?

! Do you want to minimize your administrative burden?

Know the available retirement savings vehicles

SIMPLIFIED EMPLOYEE PENSION PLAN (SEP IRA)

SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES (SIMPLE IRA)

SIMPLE 401(K)

SOLO 401(K)

DEFINED BENEFIT PLAN

Document your roles and responsibilities in the business post-retirement

Stay active indefinitely

Act as a “silent” partner

Exit but still earn a “consulting fee”

Exit with no ties

Generally best for everyone

Potential landmines for everyone

THE BUSINESS OWNER’S HIERARCHY OF INVOLVEMENT

Section 2: Retirement Planning Wrap-Up

The business should not be your sole source of retirement income. Start setting funds aside to save for retirement outside the business and consider your personal retirement income needs.

Remember the “Golden Rules” of Retirement Planning:

! Have a clear picture of what life looks like in retirement

! Determine the income replacement value of your business

! Understand how your exit strategy could impact your retirement

! Know the retirement savings vehicles available outside of your business

! Document your roles and responsibilities in the business post-retirement if you plan on continuing to receive income

Develop a Retirement Plan Now

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