10 Retirement Concerns of Small-Business Owners

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1. Third-generation family transitions are declining.

Many of the clients served by Dynasty’s advisors are either the first- or second-generation owners of family-founded and family-led businesses.

While next-generation ownership transitions are often the desire of these clients, the reality is that third-generation transfers are increasingly rare, due to a variety of factors.

On the one hand, the youngest generation may simply not want to get involved in the same line of work as their parents and grandparents. If they come from a successful family, they may choose instead to pursue the medical or legal profession, for example, or something entirely different.

Many advisors say their successful small-business owner clients are having to confront this reality and look outside their own family to conduct an ownership transition ahead of their own retirement.

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2. Economic slowdown could dent business values before retirement can happen.

Post-pandemic, some small-business owner clients have experienced favorable conditions in certain sectors, but there has been a broader slowdown in ownership transactions in the past 12 to 18 months for operating businesses being sold outside of commercial real estate assets.

Because business owners are generally well educated about valuations and exit planning, this is emerging as a real point of concern because of available resources and technology.

Just as a retirement-focused portfolio is exposed to sequence risk, so is a strategy for retirement that is based around capitalizing on the sale of a business. If the transaction value falls, that can jeopardize even a well-laid retirement strategy.

According to Dynasty’s survey, larger business-owners clients tend to get valuations done biannually or annually from an estate planning perspective, while smaller clients often do less formal and less frequent planning.

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3. Many have fears about what life means after work.

According to Dynasty’s advisors, one challenge business owners face is feeling like they are on a lonely island — which is why they need a sense of community and support coming from their advisor.

These business owners are looking for a more comprehensive resource partner who can help them in multiple aspects of their lives, like connecting them to other professionals, such as estate planning attorneys and accounts, who are knowledgeable about ownership transitions.

At the same time, business owners eyeing the transition to retirement are beginning to look closer at who they are outside of their business, what they want to do next and what will help them to live a vibrant, fulfilled future.

Advisors who can help to address both the analytical and the psychological aspects of the transition from business ownership to retirement will stand out.

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4. Small partnerships face unique ownership transition challenges.

Many small-business clients are working at family-owned businesses, but others are organized as small partnerships, and this arrangement can complicate the retirement process of the partners.

If there is a clear generational age gap between leading partners at the company, that can create a very natural retirement transition pathway for the older owner.

However, if the ages of the partners are similar and they are looking at a similar retirement timeline, that can complicate matters, especially if the owners don’t entirely see eye to eye on how best to proceed.

According to Dynasty’s advisors, most small-business owners overvalue their business and do not understand how much their participation in the operational control of their business can lower its value. When there are multiple partners involved, such issues can become that much more fraught.

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5. Formal succession plans are hard but also in hot demand.

Broadly speaking, succession planning is a top concern among small-business owners, and focusing on it earlier allows for the creation of a more saleable business with a higher valuation that will ultimately drive revenue.

According to the Dynasty advisors, business owners value comprehensive reporting and planning from financial advisors who can act as their “personal CFO” and be proactive in creating and executing financial strategies.

As previously noted, post-pandemic trends include slowing sales with lower valuations and fewer unsolicited offers, and matters could get worse if the economy tips into recession.

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6. Next-generation leaders often lack the capital for a buyout.

According to Dynasty’s survey, next-generation leaders within small businesses often lack the capital for a straight-ahead buyout, so a sale will generally require careful planning and execution.

Fortunately, there are some creative and innovative ways to create ownership opportunities for younger leaders, and for these ownership stakes to grow over time. For example, small-business owners may consider “phantom equity arrangements.”

In fact, many small independent advisory shops facing their own future ownership transitions are exploring and implementing such strategies, giving firms useful experience that they can then redeploy on behalf of clients.

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7. Fear and confusion about taxes is rampant.

Advisors in the survey reiterated time and again that many business owners overvalue their businesses, and they also broadly lack an understanding of the potential tax implications of a sale.

Expertise in this area, whether sourced from within an advisory shop or by bringing in a trusted outside expert such as a tax attorney, can be very beneficial.

In larger and more complex cases where nuanced ownership transitions are in the works, financial advisors often recommend a formal sale process that involves the appropriate legal and investment banking experts.

In the end, business owners value advisors who can help with personal financial issues, diversify wealth, minimize income taxes from a sale, and transition from business to capital management.

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8. A shifting business environment means shifting priorities.

According to advisors in the survey, some business owners were more inclined to sell or take on equity partners from 2019 to 2021. However, since the market downturn in 2022, many firms have pivoted and are focusing on managing costs rather than selling or retiring.

Some advisors say their small-business owner clients are generally realistic about valuations, but they are still often caught off guard by the complications of making a deal, especially in a rapidly evolving economic environment.

This is why ongoing discussions about succession planning are better than one-off planning sessions that could quickly go stale.

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9. Concerns for long-term customers and employees.

Advisors in the Dynasty network report that the lion’s share of small-business owners contemplating retirement voice real concern about taking care of long-term customers and employees upon exit.

When it comes to their customers, business owners feel compelled to leave their company in the hands of a new leader who shares their vision and values.

Of course, this can be very difficult to do, especially if the transition is rushed — for example if an owner’s health suddenly fails. It’s all the more reason to start planning early, advisors say.

When it comes to helping employees, many small-business owners are seeking to set up defined contribution retirement plans for the first time, spurred on by both new incentives and new mandates.

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10. Rising rates cause valuation confusion.

Many advisors cite the notable post-pandemic trends of increased business valuations and increased numbers of transactions across industries, but this trend is now slowing with higher interest rates and big questions about the economy.

As such, a top challenge is helping clients define their "number" for a strong sale price, and optimizing benefit packages to attract and retain talent that can support the business post-transaction.

When business owners believe their business is worth more than the market will actually bear, advisors can help resolve the issue by fostering a deeper understanding of industry multiples and healthy balance sheets.

For smaller businesses, investment banking services may not be needed, but the services of a business broker can be valuable.

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1. Third-generation family transitions are declining.

2. Economic slowdown could dent business values before retirement can happen.

3. Many have fears about what life means after work.

4. Small partnerships face unique ownership transition challenges.

5. Formal succession plans are hard but also in hot demand.

6. Next-generation leaders often lack the capital for a buyout.

7. Fear and confusion about taxes is rampant.

8. A shifting business environment means shifting priorities.

9. Concerns for long-term customers and employees.

10. Rising rates cause valuation confusion.

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10 Retirement Concerns of Small-Business Owners

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More on this topic

1. Third-generation family transitions are declining.

2. Economic slowdown could dent business values before retirement can happen.

3. Many have fears about what life means after work.

4. Small partnerships face unique ownership transition challenges.

5. Formal succession plans are hard but also in hot demand.

6. Next-generation leaders often lack the capital for a buyout.

7. Fear and confusion about taxes is rampant.

8. A shifting business environment means shifting priorities.

9. Concerns for long-term customers and employees.

10. Rising rates cause valuation confusion.

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