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The State of Retirement for Small Business Owners: Not Good, Says BMO

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Three-quarters of small business owners have less than $100,000 saved for retirement, a survey by BMO Wealth Management found. Few are hoping to turn the business itself into a retirement plan, as almost two-thirds said they don’t have a succession plan for when they’re ready to stop working.

Just 8% of respondents said they have over $500,000 saved for retirement, and 4% have over $1 million. Furthermore, 68% of the respondents closest to retirement, those 45 and older, said they have less than $100,000 saved.

Respondents in the survey weren’t high earners. Over three-quarters said they were taking less than $50,000 a year from the business as a salary. Most – 58% — were taking $25,000 or less. It’s no surprise then that respondents pointed to a retirement age of 72.6.

What will happen at that age is unclear, though. A quarter of respondents want to sell the business, and 22% want to hand it off to a family member. Just 7% said they want to sell it to a family member, and a full 35% don’t know how they want to exit their business.

“If the sale of your business is part of your retirement plan, there are steps that can be taken in advance to maximize enterprise value and after-tax proceeds,” Jason Miller, national head of wealth planning for BMO, said in a statement, but he noted, “it cannot be emphasized enough that an effective retirement contingency plan should include savings outside of the business assets.”

The survey noted that owners who plan to pass the business on to family members and allow for continued cash flow to fund their retirement are frequently thwarted by low success rates for inherited businesses. BMO referred to research from KPMG that shows just 30% of family businesses survive into the second generation.

Another potential challenge for clients who are considering a transition to family members in order to take advantage of valuation discounts when transferring business interests between family members.  

In August, the Treasury Department issued proposed regulations under Section 2704 of the Internal Revenue Code that apply to the valuation of interests in corporations and partnerships for estate, gift and generation-skipping transfer tax purposes, Melanie Waddell reported for in early September.

“With the proposed 2704 regulations, those valuation discounts,” Miller told ThinkAdvisor on Tuesday, “are potentially in jeopardy. That would make the transfer tax implications of transferring [a business] to the next generation […] a little less efficient than it has been historically.”

He added, “We don’t know what the final regulations are going to be, but in their current form, the proposed regulations would have a meaningful impact potentially on those strategies.”

The oldest respondents were also the least likely to consider selling their business, preferring just to close it, the report found. BMO noted those owners “had a lower expectation that they would be able to find anyone outside their family to buy the business.”

A major barrier to selling a business is that the owner’s involvement is closely tied to its success. The survey found 31% of owners believe their companies rely too much on their leadership to successfully hand it over to someone else.

To prevent turning off buyers worried about the business owner’s departure affecting sales or customer retention, Miller recommended establishing a formal management team, such as a president, CEO, CFO or key lieutenants.

“This can be very difficult for business owners to wrap their heads around, particularly when they’ve grown this business for a number of years and have really had all the control and decision making authority,” Miller said.

He also recommended maintaining several years of audited financial statements to show potential buyers.

“That sounds pretty simplistic, but there are a number of businesses that don’t necessarily have that formality.”

The survey didn’t ask respondents about professional valuations of their businesses, but a third estimated the current value of their business was less than $100,000. Advisors can be very useful to their business owner clients by helping them get a realistic idea about what their businesses are actually worth.

“What the business owners feel the value drivers of their business are might not be what the market views at the [time of sale] — whether that’s a private equity buyer, whether it’s a strategic buyer, another firm – the value drivers might be different than what’s in the owner’s mind,” Miller said.

Interestingly, 16% of respondents said lack of access to professional advice was a barrier to succession planning.

Miller said advisors should think of themselves as “the quarterback to coordinate a team of multidisciplinary experts” to help clients make realistic valuations of their business and develop strategies that will work for them.

Some business owners may not “know exactly who should be at the table. They know they need advice in different areas, but they’re not even necessarily sure which professionals should be delivering that advice,” he said.

Advisors can coordinate a team of valuation experts, estate planning attorneys or CPAs. “When you have this team of people and they coordinate together on the plan, the outcome, I’ve found, is much more optimal, or at least gives you the chance to have a much more optimal outcome,” Miller said.

“The financial advisor isn’t probably going to be the expert in all those areas on their own,” he added. “For the advisor, recognizing their own limitations in terms of expertise and topic knowledge, and bringing in the right people to help” are important ways to help their business owner clients. 

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