Transitioning ownership of the business, according to our study*, is ranked second lowest (ahead of only handling estate taxes) in terms of importance and priority. This is not all that surprising when you consider that nearly half of the business owners surveyed don’t even think about retirement or can’t imagine ever retiring.
Those who do think about eventually stepping away from the business say they plan on leaving it to a family member most often, followed by selling it to either to an outside buyer or a key employee. Liquidating the business was a plan for only 13% of those we surveyed.
There are pros and cons to all methods of exiting a business. For example, leaving the business to a family member creates a wonderful legacy, but often times, it’s a non-cash transfer (the family members don’t actually buy out the previous generation) leaving the departing owners financially tied to the business post-retirement.
Selling the business to a key employee can make for a sensible strategy because typically that individual shares the owner’s passion for the business. But the reality is most key employees must purchase ownership via an installment sale (purchase the ownership interest over a period of time), and if that individual turns out to be a better employee than entrepreneur, it could force the prior owners out of retirement and back into the business.
This underscores the importance of having meaningful dialogue about who the right people are to take over the business when you are ready to step away. Passion, family and legacy are all important considerations, but there are other important factors as well, such as how the chosen exit strategy will impact your retirement income. The reality, according to our study, is that nearly 40% of business owners don’t have a retirement income strategy outside of their businesses.
* 2015 MassMutual Business Owner Perspectives Study conducted by HawkPartners for MassMutual.