Retirement Planning for Small Business Owners with Drew Jones, CFP®, AIF®

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Retirement Planning for Small Business Owners with Drew Jones, CFP®, AIF® Show Notes

Drew Jones, CFP®, AIF® has a passion in working with small business owners, helping them get their business to be as valuable as it can possibly be before facilitating an exit strategy. As Drew makes his third appearance on The Guided Retirement Show, he and Dean Barber will discuss what small business owners need to do when it comes to retirement planning.

In this podcast interview, you’ll learn:

The Challenges and Opportunities of Retirement Planning for Small Business Owners
Retirement Planning for Small Business Owners Is a Long Process
Key Retirement Planning Considerations for Small Business Owners
Your Business Is Your Biggest Asset If You’re a Small Business Owner

Challenges of Retirement Planning for Small Business Owners

While retirement planning for business owners doesn’t apply to everyone, it very well could still apply to someone you know. There are a lot of unique challenges that that small business owners have, but they also have a lot of opportunities. Let’s start by discussing some of the challenges of retirement planning for small business owners. How do those challenges compare to the challenges that a W-2 employee faces with retirement planning?

“Small business owners have a lot more going on in their life. Their nose is to the grindstone, operating their business day to day.” – Drew Jones, CFP®, AIF®

There are a lot of moving parts to retirement planning for small business owners, as they need to develop a plan to take a company that they’ve built—that could be worth quite a bit of money—to help fund their retirement. It’s a long process to find out what it’s worth and how it works with an overall retirement plan once they decide to sell or exit the business.

Saving for Retirement as a Small Business Owner

Dean has worked with a lot of small business owners over the years and was a long-time small business owner himself. He was the founder and CEO of Barber Financial Group, which became Modern Wealth Management in April 2023, so he’s been able to relate what small business owners go through with retirement planning.

“You get into the mode of focusing on building and growing a company, and saving as much money as you possibly can. There’s not a plan for how much needs to be saved for you to retire safely in the future.” – Dean Barber

Dean shares that small business owners sometimes utilize their retirement savings as more of a protection mechanism. That way if they have a slow business cycle, they’ll have enough cash flow to funnel money back to the business to keep it running.

The Mindset of a Small Business Owner

Typically, they have employees that are relying on the viability of the business for their livelihood. Small business owners can be under an awful lot of stress. Once they get that business to where it’s running, doing well, and is finally profitable, sometimes they can take a step back and start to relax a little bit. But most small business owners don’t have that mindset to do so. Dean agrees with Drew about how they usually keep their nose to the grindstone.

“A small business owner’s largest asset is in most cases going to be their small business. But most of them have no idea what that business is worth or what their exit strategy is. They haven’t thought about that.” – Dean Barber

What Drew has noticed from the small business owners he’s worked with is that they’ll likely put more money into the business. Because that’s what they know and as they get that business going, they see the growth.

Growing their business is obviously a good thing, but if that’s their sole focus, there are other important things that can end up being neglected. Not utilizing outside savings accounts to help offset times of economic uncertainty is a prime example of that.

The Emotional Aspects of Being a Small Business Owner

You’re always going to have good times in a small business, but you’re also going to have those dry, lean times. You need to plan around that from a practical and emotional standpoint. The emotional component can be very difficult.

“(Their business) is something that in their eyes that they’ve either created or helped create. This almost becomes a living child to them. They’re in it from the very get go.” – Drew Jones, CFP®, AIF®

Small business owners see all the good and bad times of growing their business. When they get to a point of exiting, it can become a very emotional thing for them.

What’s Your Retirement Lifestyle Going to Look Like?

As a small business owner, you’re the one responsible for making all the decisions. People need you. When you sell your business and go into retirement, what are you going to do in retirement? What’s your identity going to be now that you’re no longer dedicating yourself the company you worked so hard to build?

You need to think about the core things that are really important to you as you’re planning for retirement. Is that spending more time with your family? Traveling? Testing out a hobby that you’ve always wanted to test out but haven’t had time for? Sometimes it can be hard to remember that the whole purpose for a lot of small business owners to create their business is to eventually fund those retirement goals.

Do You Want to Sell Your Business or Not?

One of the reasons why it’s more difficult to do retirement planning for a small business owner whether they want to sell or not. That’s a big question. Do they want to retain some control? A lot of small business owners don’t have any kind of business continuity plan put together.

In other words, what happens if the business owner dies? What is the continuation plan for the business? How will your spouse and your children and potentially grandchildren inherit the value of that company? Did you set up a buy-sell agreement with a key player in the organization so that if something happened, they would be funded with life insurance to buy the business?

Dean Reflects on His Experience as a Small Business Owner

Before Barber Financial Group became Modern Wealth Management, Dean owned 100% of the stock in Barber Financial Group. That meant when I passed away, his wife would’ve own 100% of the stock in Barber Financial Group. But Dean’s wife didn’t know anything about the business and didn’t have a desire to run the business.

Still, had Dean passed away, the Barber Financial Group employees would have had the responsibility of continuing to share all the profits with Dean’s wife. Well, if she wasn’t going to be doing anything for the business, that wouldn’t have made any sense.

That’s why Dean put together a buy-sell agreement several years ago. The agreement stated that if Dean died, there were three employees at the time that would have bought the business from Dean’s wife. The way that they came up with the capital was by collectively purchasing a life insurance policy on Dean that provided them enough cash to pay Dean’s wife for the business.

That way, they would’ve been able to run the business and split the ownership three ways. And Dean’s wife would’ve received cash and then had no connections with the business.

“A lot of people don’t even go to that measure to protect the spouse and to protect the business entity itself.” – Dean Barber

Who Will Take Over Your Business If You’re a Small Business Owner and Pass Away?

Drew and Dean have noticed that many small business owners don’t have that same foresight. They’ll typically assume that their kids will take over the business or have no transition plan in place.

It’s a totally different situation in corporate world if somebody leaves their corporate position. There’s usually somebody in the position below them that’s going to slide right into that role. Small businesses don’t have that luxury.

“If you don’t have that plan in place and you’re trying to get a valuation and sell that business, it can put you at a huge disadvantage.” – Drew Jones, CFP®, AIF®

When Should Small Business Owners Start Planning for Retirement?

If a small business owner wants to be out of the business by 65, Dean says they need to start the planning process by 55, not at 64. From what Dean has witnessed, acquirers of a small business will want that owner to stay in place for anywhere from three to seven years, whether it’s an internal or external acquisition.

That timeframe of that business transition usually depends upon the type of business. A lot of times the purchase agreement will state that the small business owner must stay for a certain amount of time during the transition.

Key Considerations for Selling a Small Business

For example, let’s say that a small business owner wants to retire at 65. They need to make sure that that sale of the business is done by 60. Because chances that they’ll need to stick around for a few years. But if they’re going to sell it at 60, they need to start planning for the sale at 55.

They’ll need to start getting appraisals and have someone consult on how to make the business as valuable as possible. They’ll need to consider what those acquisitions will look like within the industry they’re in.

“What are the acquirers looking for and how do you make that business more beautiful, pretty, and valuable so that you get top dollar when you sell that at age 60. Then by 65, you’re free.” – Dean Barber

Delegate, Delegate, Delegate

Depending on the business and who’s buying it, some people aren’t going to be thrilled if the owner is there 70-80 hours a week. Having a reduced workload with other people picking up the slack could serve for a smoother transition.

“If you want to get top dollar for your business while you’re there, one thing that that business owner needs to do is make themselves obsolete in the business.” – Dean Barber

In other words, if the business is thriving without the owner’s presence before they sell and doesn’t require the owner to be there every day, the business will be that much more valuable to an acquirer.

What Are the Acquirer’s Intentions

Before selling a business, the business owner also needs to understand why the acquirer wants to acquire the business. Are they buying it as an investment or are they acquiring the business to operate it? And again, it depends on the type of business.

The business is more valuable if it can be purchased by an investor. If the business continues to throw off profits, the acquirer will get a lot more. If they need to stop what they’re doing and be an operator in this business that the previous owner created, that’s going to make that business less valuable.

The Valuation of the Business

It’s important to go back to the valuation. We’ve talked about the timing for that needing to happen, but there’s more to it than that. It’s also important in the valuation to have a good dollar amount signed to the sale of the company.

“If you talk to a lot of business owners and they were to put a value on their company, it’s always more than likely going to be higher than the market value or what somebody is willing to pay for it.” – Drew Jones, CFP®, AIF®

It’s easy to see what they feel that way because that small business owner can put a lot of effort into growing the business. Whatever industry a small business owner is in, they’re going to talk to their peers and see some of them sell their businesses. It’s only natural to ask about much they received from selling it.

Then, the small business owner’s mind will start thinking, “If that’s how much this person got from selling their business, I should get at least this much.” But they won’t know anything about the internal workings of the other person’s business that was sold in most cases.

Getting an Outside Perspective

It’s good to have a firm outside of your company that will do business valuations. That is one key thing as we talk about business owners transitioning to the retirement phase. Putting that plan together is a lot easier if you know exactly kind of what that valuation of that company is going to be.

“That is going to be the engine that kind of drives your retirement. You can plan around that all day long with what’s important to that business owner as they get into retirement.” – Drew Jones, CFP®, AIF®

Retirement Planning for Small Business Owners Is a Long Process

To help highlight the importance of retirement planning for small business, we figured it would be a good idea to share a few stories of small business owners that Modern Wealth has helped with planning for retirement. We can’t stress enough that it’s a long process for small business owners to get from considering the sale of their business to retiring.

Dean has a client who was a small business owner that started planning the exit of his business about a decade ago. He sold his business about seven years ago and he was finally out of the business in 2023. It was about a 10-year process from the beginning of thinking about selling to doing the deal to being out of the business.

Before to selling the business, Dean and his client looked at the valuation of the business and what they thought it was worth at that time and how much they thought the client could grow the value of the business over the next four or five years. Dean started putting those numbers into the client’s plan and repeated that process each year as they updated the valuation.

“If you’re not taking those steps, you’re guessing.” – Dean Barber

The Structure of the Sale

If you’re talking about the sale of the business, it’s the structure of that sale. You’ll want to keep track of the value prior to the sale, but how is the sale happening? Is it lump sum payout? Is it an installment period? There are pros and cons to each side.

“Do you want to be on the hook for a three, five, or maybe seven-year installment plan? Not a lot of people are going to want it. All these things need to go into the sale of the company. How does that benefit your retirement plan?” – Drew Jones, CFP®, AIF®

Another Story for a Small Business Owner Dean Has Worked with

Another one of Dean’s clients that was a small business owner also wanted to sell his business. Dean had planned to get a valuation for the business, but the client already decided that he the business to his daughter and son-in-law.

So, Dean asked him how he knew what the business was worth. He had decided he was just going to sell it to them for $2 million and carry the note. Dean said that was a mistake and tried to talk him out of it. Dean tried to talk his client into making his daughter and son-in-law get a small business loan so he could get the money and protect himself.

The agreement was that the daughter and son-in-law were going to pay Dean’s client in installments and provide up-to-date financials each month. But within probably nine months of the deal being done, they stopped sending him financials. They had the van that he had from the business repossessed and stopped making any payments to him.

“Now, you wind up with father, daughter, and son-in-law battling this out in court, which never had to happen. It was a nightmare for that guy because he spent his entire life building that business.” – Dean Barber

Fortunately, he did a good job of saving in other areas. So, it’s not like he can’t do what he wants to do in retirement.

And a Story About One of Dean’s Friend’s Experience as a Small Business Owner

Thinking about retirement planning for small business owners also reminded Dean about his friend who owned a company that built stand-up concrete walls. You’ll see a lot of those in big warehouses.

His company developed the technology to build and ship those stand-up walls. He sold his business to three people that were internal in the business. He was smart enough to put in the contract that if they defaulted on payments to him, he would revert to 100% owner of the business.

After about three years of running the business into the ground, they couldn’t make the payments. So, Dean’s friend took over the business over again. It took him about three or four years to build the business back up before he sold it again. But on the second go-around, he sold it for cash.

There are so many ways that a deal could go wrong. Dean believes that financing is the most dangerous thing that a small business owner can do. But a lot of small business owners will go down that path just because they think that they won’t be impacted as much by taxes.

“Don’t let the tax dog wag the tail of your deal. Most business owners only get one chance to exit, and they need to make sure it’s done right.” – Dean Barber

Working with a Team of Financial Professionals

Whenever Drew talks with a client who is preparing to transition from being a small business owner to retirement, he understands that he shouldn’t be the only financial professional involved. The small business owner should be working with a financial advisor, CPA, and an attorney.

Whenever Drew talks with clients that are getting ready to transition from business owner to retirement, those are the key things that you want to have in place. It’s critical to have a good financial advisor, but it’s just as important to work with a CPA and attorney. Those financial professionals all need to communicate with each other.

“Think of it as a wheel and all these people are on the outside of that. Usually, the business owner is in the middle trying to coordinate everything. All those people need to be communicating on behalf of that business owner.” – Drew Jones, CFP®, AIF®

That Team of Professionals Needs to Put the Small Business Owner First

The CFP® professional should be the catalyst for the communication. Once that exodus takes place, the CFP® professional creates the strategy for the small business owner to have all the income they need for the rest of their life.

And there are different tax structures that need to be considered. Again, if you’re a small business owner and want to exit at 65, start planning for retirement at 55.

“It may seem insane for somebody to think about that because that’s 10 years out. Well, you better. Otherwise, you’re going to work until 75.” – Dean Barber

Key Tax Considerations

One of Drew’s clients was a small business owner who owned a warehouse and has totally stepped away from the business. However, they’re still getting the income from the rental of this warehouse.

“You need to understand all the fine details of how this can work out for you to benefit your plan.” – Drew Jones, CFP®, AIF®

There’s a reason to do that from a tax perspective as well. If the owner of the warehouse can continue to get the rent on it, their beneficiaries will get a step up on the basis whenever the owner passes away. Then, if the beneficiaries want to sell the property at that point, they can do so with no taxes.

But chances are that the individual that owns it has depreciated it down to a point where if they sell it, there are capital gains and depreciation recapture. They could lose a lot of money to taxes and then it might be difficult to replace the same kind of income that they could get by just continuing to rent a building. That all needs to be looked at.

“If you think about that business owner, they need the financial planner to start, and then they need the CPA. Then, they need the attorney to determine the right structure. All three of those people need to work together. They need to get the structure right and the tax piece of it right before putting the business up for sale.” – Dean Barber

Your Business Is Your Biggest Asset

As Dean and Drew have worked with small business owners over the years, no one has ever told them that they started planning for retirement too soon. There have been several instances, though, where small business owners wish they had started planning for retirement sooner.

“The moral the story for small business owners is your business is your biggest asset.” – Dean Barber

Planning Is Pivotal

Another one of Dean’s friend started a multi-million-dollar roofing business. Dean talked to him a few years ago and told him that he was in a scenario where he didn’t have to work again, but he was still working 60-80 hours a week and the business relied on him.

If he wanted to make his business valuable, he needed to figure out over the next four or five years so he could step away in his mid-50s. While Dean’s friend still doesn’t intend to sell his business, the conversation with Dean caused him to reevaluate his situation.

In January 2025, he’s planning to buy himself a place in Florida and is going to spend six to eight months a year there because his team is now in place to run the business without him being there daily.

“He’s doing an internal sale of about 40% to couple of his partners, but he’s going to remain a majority owner for the foreseeable future. If it hadn’t been for a lot of discussion and a lot of planning, that would’ve never happened the way that it did.” – Dean Barber

That scenario serves as an example of a small business owner getting the best of both worlds. You don’t necessarily need to totally sever from the business that you created, but you can have a reduced capacity there and still have a good stream of either income into retirement or hopefully keep building up the valuation of that company every year until deciding to sell.

Other Components to Selling a Small Business

There are other components to selling a small business as well. Does the business own real estate? Or does the small business owner own the real estate under a separate LLC? And what will happen when that business is sold? Is the acquirer going to buy the building or is the owner going to continue to own the LLC that owns the building and continue to charge rent to the new acquirer?

There are so many nuances that a small business owner needs to think about with retirement planning. If they’re not working with the right financial planning team and don’t start planning early enough, they can get caught in a position where their health fails them or have some other kind of emergency that can lead to having a fire sale. And nobody wants that.

Again, Delegate, Delegate, Delegate

Any business owner that has built a valuable business should understand the value of subject matter experts within their business. It’s critical to understand that the subject matter experts outside the business to facilitate an effective exit are just as important. Those people need to go on the payroll before selling the business.

“A smart business owner is going to start that plan to exit the business 10 years before they want to retire.” – Dean Barber

Do You Have Any Questions About Retirement Planning for Small Business Owners?

For Drew, the best part of helping small business owners with retirement planning is seeing the passion and the fortitude that that they had to create their own business. And it’s even more interesting to him to learn about their business.

“That’s what I enjoy about it—working with that person to understand their story and helping relate to what that looks like for their retirement. Then, it’s marrying those two things that were important to them in the past and what’s going to be even more important in the future.” – Drew Jones, CFP®, AIF®

Whether you’re a small business owner or know someone who is a small business owner, we hope you found what Drew and Dean shared to be insightful. While Dean and Drew shared some key considerations for retirement planning for small business owners, so much of the planning is going to depend on the unique situation of the small business owner and their business.

Just like Drew said, getting to know the background of the small business owner and their business is very enjoyable. We welcome you to start a conversation with our team below to see how we can assist you (or someone you know) with retirement planning for small business owners.

Schedule a Meeting

We look forward to building an exit strategy for small business owners so they can have more confidence that they’re doing the right things with their money, freedom from financial stress, and time to spend doing the things they love.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC, does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.