Transitions 2020: Retirement Lifestyles

Meet Bill. For four decades, he’s owned manufacturing company, one he took from half a dozen employees at start-up to more than 200 today. Over those years, he built something sustainable, something that is now in demand from other companies looking to buy operations like his.

In the three to five years Bill needs to effect a sale and move into retirement, he’ll have a lot on his plate: Due-diligence requests from various buyers, meetings with brokers, accountants and lawyers to ascertain the true value of his operation, negotiations to keep key personnel on board after the sale, keeping tabs on the market to ensure he’s not selling when valuations are down—oh, and he has to run the business, too. Few things take the shine off of a buyer’s bidding price like sales that have been shrinking while trying to manage this transition.

But Bill knows that when the deal is done, he’ll be free to head to Montana and pursue his passion for fly fishing. Days at a time. Maybe weeks at a time.

Until one day, Bill decides that he’s hand-tied enough lures, and starts to think that there must be more to retirement than snapping a line across a trout stream. And if he’s still in his 50s or 60s, he’s got a lot of days to fill with something other than fishing.

He got the price he wanted, he’s financially secure for the rest of his of his life, and perhaps the lives of his children. But he missed critical step of the business transition process by not thinking about what that retirement lifestyle would actually look like, in detail.

Kyle Danner, whose family-business consultancy helps owners chart their path to a successful sale and beyond, would tell you that Bill overlooked some obvious elements.

“When owners think of retirement, they focus on replacing income, not on the bigger picture of building a new life,” Danner says. “The happiest owners are those who spent as much time and energy preparing for life after the sale as they did in preparing the business to sell.” It’s important, he says, to put one’s lifetime pursuits into the proper perspective.

“Work gives owners—and really, everyone—four things: Purpose: What’s their why? Structure: Where do they go? Connection: Who do they spend their time with? Status: Who will they matter to?” Danner says. “Spending more time with family is usually the go-to answer, but it can’t be the only answer. Owners must consider how they’ll replace the purpose, structure, connection and status that work gives them beyond their family.”

Those considerations will require as much planning and forethought as any other aspect of a sale, brokers and other professionals say.

Of course, nothing allows a business owner to chart a happy retirement if the financial foundation isn’t in place. And a lot of factors come together to ensure that a sale produces that foundation, and usually, well before a sale takes place.

“Depth of the management team beyond the principal owner or owners is critical to ensure the business continues to operate,” says Bill Conway of CC Capital Advisors. Employing that strategy can help ensure that an owner isn’t spread too thin with his time in the run-up to a sale, placing a potential valuation in peril.

Says Conway: “Owners who have the ability to move out of the day-to-day operations (i.e. become ‘chairman’) and empower others allows for a smoother emotional and operational transition for all parties involved in a transaction.”

So consider all the potential aspects of your life after retirement, whether it entails travel, second acts in business, finally learning to play that piano, establishing a philanthropic legacy—the possibilities are literally endless, even if the remaining time isn’t.

The key to any of them is capturing the optimal amount after the sale.

“It is important for business owners to meet with their financial adviser to run different retirement-spending scenarios based on various sale prices, net of taxes, when contemplating a sale,” says Molly Rothove, a wealth adviser with Creative Planning in Overland Park. “That way, the owner will know what retirement lifestyle they can expect based on a specific sale price.”

It would be indeed be unfortunate, and unnecessarily painful, for a seller to discover after the fact that they did not receive enough proceeds to meet their retirement spending needs, Rothove said. And there’s a consequence to that.

“That can lead to regret and depression in a moment that should be filled with happiness and a sense of accomplishment,” she says. “If an owner receives an offer that is lower than their expectations and has had this meeting with their adviser, then the owner will at least be making an informed decision to (1) decline the offer and continue working or (2) accept the offer and accept a lower standard of living in retirement.”

A great deal of the strategy for charting that retirement lifestyle depends on whether an owner can confidently expect to get a long-envisioned price. If so, turning to a wealth-management professional before the sale isn’t simply advisable, it’s an absolute must to ensure you’re not paying more than what’s legally required when the tax man checks in.

Owners need to meet with their CPAs and attorneys well before a sale to grasp the full impact of tax laws, advisers say, because they will vary depending on whether a transaction is an asset sale or a stock sale, and on the way it’s structured—lump sum vs. payout over several years, for example.

“The buyer may have a different interest in how the sale is structured,” Rothove said, including the types of benefits that could hurt the seller from an income tax standpoint. “Understanding those implications can help you in the negotiation process.”

There are various strategies for getting the tax part right, she said.

“Before the seller has a letter of intent, he or she can transfer an interest of the company to a Charitable Remainder Trust and/or to an Irrevocable Trust that benefits their children,” Rothove said. “When the business is sold, any interest owned by a Charitable Remainder Trust will avoid capital gains tax and leave more money for charitable purposes down the road.”

Moreover, if a seller transfers an interest of the company to an Irrevocable Trust for the benefit of their children before a sale and before a letter of intent, then the seller can likely receive a qualified appraisal of the company that is lower than the expected sale price.

“Upon the sale of the company, the growth of the company over the appraised value will avoid estate taxes,” Rothove said. “These are just two examples that can make a big difference in charitable and generational family planning.”

Conway concurred with the need to engage trusted advisers sooner rather than later.

“Consulting both an estate lawyer and financial planner, both of whom are accustomed to dealing with high-net-worth individuals and families, should be done at the onset of transitioning a business to address estate, charitable, tax and other facets,” he said. “Refocusing a business owner’s energy post-sale into charitable endeavors can be an effective way to handle this emotional transition.”

And what about philanthropy? For many—especially those who will realize sale proceeds well beyond what they need to secure financial independence in retirement—the urge to give back to the community that helped them create that wealth can be powerful.

A seller who is charitably inclined, Rothove said, “will want to work with his or her CPA to determine if it is better from an income-tax perspective to donate cash to a family foundation after the sale or donate an interest in the company to a family foundation before the sale. There is no one-size-fits-all” answer, and it can depend on whether other strategies are being utilized and the qualified appraisal of the company.”

Brokers and others who advise smallbusiness owners say that, invariably, a lack of understanding of their company’s true place in the market leads to delusions about the value of the enterprise. Sometimes, long-held dreams of instant wealth come crashing down around an owner who doesn’t have the years remaining to significantly elevate the value of the business. One way to help avoid that is to ensure that more outside interests are coming to the table.

“Unless circumstances require a fast sale, an owner must be prepared to entertain multiple offers,” Danner said. “It’s exhausting and frustrating, but owners don’t want to be in the position where they must sell and not receive the full value of their company.”

As Conway noted, failure to appreciate the role of the market in the whole process is akin to painting a picture of your Golden Years on the wrong canvas.

“Retirement lifestyle can be tricky to address, given it means different things to different people,” he says. “But business owners cannot approach a transaction with the mindset of “I need $X to live comfortably in retirement”, when “$X” may not reflect the value of the business being sold. The marketplace dictates valuation, not an owner’s desired retirement lifestyle.”