Atlanta Financial Blog

Business Owners Creating Liquidity For Retirement

Rick Henderson, CPA, CFP®, AIF®
September 27, 2017

Successful business owners often struggle with how to exit their businesses and create enough liquidity to support their retirement.  If you are a business owner, there is a good chance that your business is your most valuable asset.  However, research shows that over 70 % of business owners do not have a formalized exit strategy.1 While the details of exit planning and getting your business in the best shape to maximize its’ value and transition from your ownership and control are beyond the scope of this post, there are a variety of ways that you can create liquidity to support your retirement.

At the most basic level, as a business owner, you can use traditional retirement plan strategies such as 401(k) and profit sharing plans, SEP, and Simple plans to build your liquidity for retirement.  These types of plans allow you as well as the company to contribute to your retirement in a tax efficient manner.

A more advanced type of tax deductible retirement plan is a defined-benefit pension plan.  This potentially can work very well if you, the owner, are older relative to the age of the other employees of the company.  Under this type of plan, usually the majority of payments to the plan go to the benefit of the owner and annual contributions to the plan by the company for the benefit of an older owner can exceed $200,000 per year.

Additionally, there are other plans that are used to enhance the amount that can be saved for retirement for owners and key executives. These plans are often referred to as non-qualified retirement plans, and can be used by business owners to supplement their retirement income. Please note that these plans do not offer the same tax benefits as traditional retirement plan strategies and the assets in these plans remain subject to the claims of corporate creditors. Therefore, the financial strength of the company, now and into the future, should be taken into consideration.

Another strategy is to individually own and lease back to the company assets like the real estate that the company uses. Typically, this includes physical facilities like manufacturing or distribution facilities, or office buildings that the company occupies. Net rental income from these facilities can be used to supplement your retirement income, or they can be sold to generate principal which then can be invested to supplement your retirement income.

If your exit strategy is to retain family ownership with either family members running the business or hiring outside management, and cash flow is good, you may be able to continue to receive some sort of income from the company.  Or, the company might be able to borrow money based on its cash flow or assets and provide you liquidity with those funds using one or more of a different number of strategies to get the money to you.

Finally, selling the company is often the major liquidity event for business owners. The two primary types of sales of companies are to outsiders or to employees. For an outsider sale, usually there are individuals or companies who want to own your business for a variety of reasons, and the profits from the sale are usually immediately taxable. When selling to employees, a strategy that is often used is called an Employee Stock Ownership Plan.  This is a plan that has strict guidelines and can be used to transfer ownership to the employees of a company in a tax-efficient manner.

If you are a business owner, creating liquidity to support your retirement requires planning ahead.  First in terms of building liquid assets outside of the business using some or all of the strategies described above, and second by putting together and acting on a comprehensive exit strategy for your business well ahead of your retirement date.  If you are like many business owners, the time to start taking action is now.

1Ionnou, Lori. “Small Biz Owners Ignoring Succession Advice: Poll.” April 13, 2015.

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