Thinking about retirement might be the last item on your to-do list while you’re busy running your small business. But no matter your age or how new your business is, it’s never too early to think about an exit strategy. After all, being old and broke is the last place you want to end up in a few decades from now. 

The first step in preparing for retirement should be determining what you want to do with your business when it’s time to ride off into the sunset. Do you plan to sell your business and use the proceeds to help fund your retirement? Or do you dream of passing it along to your children or other family members? 

How Do You Plan for Retirement as a Small Business Owner? 

No matter what you plan to do with your business when you retire, saving for retirement throughout your career is one of the smartest things you can do. To get started, you’ll first need to answer some important questions about your ideal retirement lifestyle, including: 

• Where will your retirement income come from? 

• How much money will you need to retire? 

• What age do you hope to retire, and how much will you need to save each month to make that happen? 

There are plenty of free retirement calculators online that can give you a good estimate based on your goals. If there is a dream place you want to spend your golden years, look into the cost of living there — you might be surprised! And don’t forget that as you get older, healthcare costs often go up, so factor that into your plans too. Speak to a financial advisor to help you figure things out. Many personal financial websites make it easy (and free) to find one. 

How Do You Save for Retirement as a Small Business Owner? 

Small business owners often overestimate the value of their business and assume that selling it one day will bring in enough income to fund their retirement. Don’t count on it. A business is only worth what a buyer is willing to pay for it. If you own a mom-and-pop shop — like a retail store, restaurant, or a service company such as a dry cleaning or plumbing business — with relatively low profit margins, chances are that you won’t make as much selling it as you hoped.  

The solution? Start saving for retirement as early — and as consistently — as possible. As a small business owner, there are several retirement accounts available to you, even if you’re self-employed and working solo. 

Roger Morisette, vice president of the Small Business Retirement Products unit at Fidelity Investments, told Kapitus that business owners still have plenty of options. 

“There are a number of individual retirement account (IRA) options for self-employed individuals and small business owners, including traditional IRAs and Roth IRAs,” he said. “For owner-only businesses with no employees other than a spouse, the self-employed 401(k), also commonly referred to as the solo 401(k), is also available. If you want to contribute more, you might consider a SEP IRA, where contributions are made by the employer only and the annual contribution limit is much higher than other plans. Each of these plans offers tax advantages and flexibility for small business owners looking to build long-term savings.” 

If you’re not sure where to begin, a financial advisor can help you explore your investment options and build a diversified investment portfolio that aligns with your retirement goals.  Most retirement accounts — be it a 401(k) plan or an IRA — allow you to contribute pretax dollars and will not tax you until you retire (or if you make an early withdrawal). Even $100 pretax dollars per paycheck can add up over the years, so start saving now. 

How Do You Valuate Your Business? 

If you plan to sell your business, it’s a good idea to get a rough estimate of its worth, at least on an annual basis. This process can be a bit complicated, so you may want to work with your accountant or a mergers and acquisitions (M&A) advisor who specializes in small- and medium-sized businesses (SMBs). 

 Start with your cash flow: Calculate the value of your assets and deduct your liabilities. Your assets include current and outstanding invoices, equipment and inventory. Then, subtract any outstanding debt. This will give you a good starting point for determining the value of your business. 

1. Determine your gross annual earnings: Look at how much your business makes annually through sales. This is often referred to by large corporations as earnings before interest, taxes, depreciation and amortization (EBITDA). A company’s rough value is often calculated by using a multiple of its gross earnings or cash flow. 
2. Consult an expert about industry multiples: An M&A advisor or accountant can tell you what multiples are used in your specific industry and location. For example, if you own a small tool manufacturing and supply shop in a wealthy location such as New York City, the average multiple might be five. Therefore, if your business’ gross earnings are $500,000, it could sell for $2.5 million. 
3. Consider your client base: If you’re an accounting or law firm or an independent medical practice and have an established base of long-time clients or patients, that should be a negotiating point when you go to sell your business. Typically, businesses with long-time clients fetch higher multiples than businesses such as retail stores or restaurants that have a tougher time keeping track of a fixed client base than most other small businesses. 

Once you have a rough idea of the value of your business, you should factor that into your overall retirement planning alongside your savings and investments. 

How Do You Pass Your Business to Your Heirs? 

If you’ve saved enough for retirement and want your child or another close relative to inherit your business, there are a couple of logistical and financial considerations to examine: 

1. Make sure your child is ready: They should be properly educated, trained, and willing to run your business. 
2. Have a plan if you have multiple children: If more than one child wants to inherit a piece of your business, make sure you speak with your accountant and your kids about how they will split up your business and what tax consequences each of them might face. 

Start Early 

When it comes to planning your retirement, do not believe the old saying that time is on your side. Start saving early — you don’t want to be struggling in your golden years, and you certainly want your children to be ready for the day they take over your business. The sooner you get started, the better off you will be.