Selling a successful business can be a great way to create a lump sum for retirement. But if you are careless, you could lose out on a reliable nest egg.
Richard Watson, Wells Fargo Senior Director of Planning for Business Advisory Services, shares the top mistakes entrepreneurs make when it comes to retirement.
No. 1: Not diversifying.
Many business owners view their companies as their biggest assets. But it shouldn’t be the only asset.
Watson says through the years of operation, too many business owners invest only back into the company, or in real estate for office space. But, he says, it’s important to have liquid assets aside from the business, in a retirement vehicle like an IRA or a 401(K) for instance.
No. 2: Not planning ahead.
Selling a business is a time-consuming process when done successfully, says Watson.
“The actual execution of the transition often takes nine to 12 months,” he says. And before even listing the company, you must clean up shop, he says.
“Pre-sale planning can take two to three years,” says Watson.
No. 3: Only speaking with one potential buyer.
Watson says many business owners start talking to one potential buyer, and forget that better offers might be available.
“It’s most successful to create a private auction with multiple bidders, where you give them the same information at the same time,” says Watson.
No. 4: Don’t expect to be paid fully in cash.
Looking for one big payout? Think again.
“Last year, 30% of business sales involved a seller’s note,” says Watson. This means that over three, or five or even seven years, the seller will receive payments that add up to the total worth of the business. This comes with risks, however, and highlights the importance of diversifying your assets for retirement.
“If the business goes through a financial reversal, the owner may not get all those payments on time,” says Watson.