When it comes to retirement planning, one might think that small business owners are among those better prepared for their golden years than rank-and-file workers. Alas, that’s not necessarily the case for a solid majority of the entrepreneurial class.

Related: Retirement planning for small business owners

Nearly 7 in 10 (68 percent of) small business owners ages 45 to 64 polled in a BMO Wealth Management survey say they have retirement savings of less than $100,000. Only 11 percent of respondents in this age range can claim savings of more than $500,000.

Part of the problem for small business owners is a lack of planning on an interrelated issue: how and when to the exit the company.

“Retiring from your own business can be difficult after having invested the better part of your working years to achieve success,” the report notes. “For many business owners, a retirement date is not always within their control. And the funds available for retirement can vary, especially if the owner was depending on either selling their business or continuing to draw income from the operating business.”

Most are depending on the former — but doing little about it. When asked if they have an active business succession plan to help sell, transfer or wind down their business, nearly two-thirds (65 percent) of the small business owner surveyed say they don’t. Equally concerning: Just 9 percent of respondents had an up-to-date, written plan.

Even among the pre-retirement crowd (business owners between ages 45 and 64), the figure caps at 10 percent. Only one-fifth (20 percent) of all the poll respondents acknowledge having an informal, unwritten business succession plan.

The lack of planning can be particularly consequential for business owners because of tax issues. As LifeHealthPro contributor David Stone noted in a July 28 article, the type of sale will determine the amount of tax paid on reportable income from the transaction — tax that can take a hefty chunk out of a nest egg.

To boot, the business’s value to a prospective buyer may not be as much as the owner is hoping for. Some reasons why: a lack of steady cash flow; weak or inconsistent demand for the products or services on offer; or a lack of talented executives to keep business operations humming during and after a transitional period.

Hence the need for personal savings independent of value tied up in business to fund ongoing retirement needs. On this score, the BMO survey results are concerning, especially in respect to those closer to retirement.

Related: Are you asking the right succession planning questions?

Most small business owners surveyed by BMO Wealth Management (55 percent) estimate the value of their company at less than $500,000.

The problem isn’t necessarily overspending that cuts into retirement savings. When asked how much in income they’re drawing from their businesses to support personal expenses, just over three-quarters (77 percent) say they take out $50,000 annually. Fewer than 1 in 10 (8 percent) of business owners withdraw over $100,000 per year.

Related: Are you asking the right succession planning questions?

How much do the owners think they could get today for their companies? A majority of those surveyed (55 percent) estimate the total at less than $500,000. Just 13 percent pegged the value $1,000,000-plus — almost enough to fund a 25-year retirement.

As the chart on this page shows, drawing down retirement assets at a rate of $50,000 per year can deplete an account starting with $500,000 within 12 years. To sustain this retirement income between ages 65 and 90, business owners would need twice the initial savings amount or nearly $1,100,000.

As to exit options that might yield additional money needed to cover a retirement funding gap, survey respondents identify the following as a preference:

    • sell the business to an unrelated person (25 percent);

    • transfer the business to a family member for no consideration (22 percent);

    • wind down and close the business (11 percent); or

    • sell the business to a family member (7 percent).

A sizeable minority (35 percent) say they’re uncertain as to which of the above options they would pursue.

The most popular options, selling to an outside party, may be the most challenging. Often, business owners have a hard time finding a willing buyer who’s prepared to ink a deal on mutually acceptable terms.

This difficulty is reflected in the survey results: More than 3 in 10 respondents (31 percent) say finding a suitable buyer is a “barrier” to exit. Additional roadblocks flagged by business owners include over-dependence on the owner’s leadership (31 percent); and determining the value of the business (28 percent).

Conducted by ValidateIt Technologies Inc. in June and July, the BMO survey polled 403 American small business owners between the ages of 18 and 64 with at least two employees. Keep reading to see more detailed illustrations of the survey results.

Related: SMB owners rethinking retirement benefits to retain, recruit

Nearly 7 in 10 (68 percent) of BMO survey respondents ages 45 to 64 say they have retirement savings of less than $100,000. Only 11 percent of respondents in this age range had saved more than $500,000.

 

Just over three-quarters (77 percent) of business owners say they take out $50,000 annually to cover personal expenses. Fewer than 1 in 10 withdraw over $100,000 annually. (Click on chart to enlarge.)

 

More than 4 out of every 5 (81 percent) of the BMO respondents say they can save $25,000 or less for their retirement on an annual basis. (Click on chart to enlarge.)

As this chart shows, drawing down retirement assets at a rate of $50,000 per year can deplete an account starting with $500,000 within 12 years. To sustain this retirement income between ages 65 and 90, business owners would need twice the initial savings amount or nearly $1,100,000. (Cliick on chart to enlarge.)

More than 3 in 10 respondents (31 percent) say finding a suitable buyer is a “barrier” to exit. Other major roadblocks include over-dependence on the owner’s leadership and determining the value of the business. (Click on chart to enlarge.)