Why it’s so hard for business owners to exit “and let go of their baby”

Why it’s so hard for business owners to exit “and let go of their baby”

An owner invests so much into their business financially and emotionally, it can be hard for them to leave.

So, while almost 60% of business owners say they would exit today if their financial security were assured*, over 60% also say they worry about missing their role in the business after retiring**.

With it being so difficult to let go, many owners don’t know when — or if — they will retire. Eight in 10 business owners do not have a timeline for retiring and the rest say they do not imagine doing so at all, according to MassMutual’s 2018 Business Owners Perspective Study.

“Business owners have conflicting struggles going on in their heads about why it’s so difficult to exit. They often have an easier time articulating the notion that the business is their baby, but in many cases the real reason they never leave is because the business affords their lifestyle” said Brian Trzcinski, director of business market development for MassMutual.

To successfully exit a business, owners need to address both their financial and emotional reasons for holding on to their companies. They must create financial independence and goals for life without their businesses.

Financial dependence

While 56% of business owners are extremely or very confident of having sufficient money from a variety of sources to retire, three out of four have less than $500,000 saved in their retirement accounts, according to the 2018 MassMutual 2018 Business Owners Perspective Study. That means many owners underestimate their financial dependence on their businesses and may need to either rely on proceeds from its sale or continue to receive post-retirement income from it to live the life they desire after exiting the business.

“Typically, the business is their largest asset and their largest source of income, so it will play an important role in their retirement. But it can’t be the only source they rely upon,” Trzcinski said.

Owners need a precise calculation of how much money they will need in retirement and an accurate and current valuation of their company. With those two values, they can determine how much the business could be worth, as well as the amount of any additional income they might need to fund their retirement.

“The sooner they do this, the longer they will have to close the gap between what the business is worth and what they will need,” Trzcinski said.

In calculating their post-retirement needs, owners should account for all of the money they pull out of the business now, not just their salaries. This could mean any benefits they receive, such as health insurance, as well as personal expenses they may run through the business, such as payments for entertainment or travel. Trzcinski recalled one business owner that paid business expenses through their personal credit card and used the bonus points to fund the family vacation each year.

Business owners can then close any income gaps through an income replacement strategy. This exercise helps the business owners determine how much the business can realistically contribute to the retirement income strategy. Then, they can help close the gaps by putting some of the money they earn through the business toward savings and investment vehicles outside the business. “It’s OK not to put every cent you make back into the business,” Trzcinski said. “Once the business is profitable, owners should find a healthy balance between their investment in growing the business and saving for retirement.”

Unprepared emotionally

Sometimes a business owner has the financial assets to retire, but is not ready emotionally to stop being a business owner. Once a business can finance the lifestyle they want, the owner needs to plan when and how they will leave it.

“You shouldn’t stay in the business and attempt to grow it if you’re only doing it because you have nothing else to do or you don’t trust it with a successor,” Trzcinski said. Nor should an owner hang on because the business has slipped and is beyond the owner’s ability to fix.

A common reason many businesses fail after owners leave is they held on too long or did not plan their transition properly, Trzcinski said. But owners should not feel compelled to walk away earlier than they want to. “A good reason to keep growing the business is you still have that fire in your belly.” Other reasons to stay may include grooming the eventual successor or making the business more attractive to potential acquirers. .

An owner’s identity is often tied to their business. To avoid future regret or emptiness, owners should plan how they will spend their time and energy when they no longer work in their company.

After retiring, many owners become more involved in their community by volunteering or consulting as a way to transition away from the business. Trzcinski said a couple that owned a manufacturing business created a “re-engagement plan” when the wife wanted to retire but the husband did not, which resulted in a planned and smooth transition for the owners and the business.

Exiting successfully

Keeping or leaving should be both a business and personal decision. Finding that balance and ensuring an owner’s personal financial future and post-business plans coordinate with the future needs of the company is vital for a successful transition and a happy retirement.

An owner’s involvement in the business post-retirement generally falls into one of four categories based on their roles and responsibilities:

  • Exit with no ties.
  • Act as a silent partner.
  • Exit but still earn a “consulting fee.”
  • Stay active indefinitely.

The less certain the owner’s post-retirement role is and the more they depend on the business for income, the more challenges there are for everyone involved, including family, employees and new owners. Ideally, an owner exits with no ties, but too often their emotional feelings and continued financial needs keep them involved, especially in ownership transfers within families.

“A lot of outgoing business owners expect the next generation to be comfortable with them sticking around, but they’ve never had that conversation about what it would mean from a financial perspective or in the evolving autonomy for the new owner,” Trzcinski said.

Planning early, diversifying assets, communicating goals and setting a timetable are the keys to exiting successfully, Trzcinski said. “Too often, we see business owners who keep kicking the can down the road. The next generation is ready to take over, but the current owners won’t leave. You have to set a timetable and stick to it.”

Though an owner may have trouble letting go of “their baby,” whether for financial reasons, emotional reasons or both, Trzcinski said departing owners need to accept that their business can continue without them if they plan accordingly.

UBS Investor Watch, Who’s The Boss, 2018

** BEI Business Owner Survey, 2019

To learn more about your options to exit your family business please visit www.massmutual.com/business-owners.

This post was provided by MassMutual and the opinions expressed in this article are the author’s own. MassMutual offers this as educational information only.