If you own your own business, it's best to start...

If you own your own business, it's best to start planning now for what will happen to it when you retire. You can find a successor to take over the business, sell it or close it down. Credit: Getty Images

Retiring is a process. It involves preparing your finances, your relationships and yourself. And if you’re a business owner, there’s an extra step — deciding what’s next for your customers and employees.

As soon as you start thinking about your own retirement, start thinking about what will happen to your business, says Paul Tramontano, executive managing director and wealth manager at Cresset Capital, a financial advisory firm that works with entrepreneurs.

“You have a lot of optionality as you think about transitioning your business to the next generation or selling it,” Tramontano says. “The earlier, the better.”

In general, there are three paths business owners can take as they prepare to retire: finding a successor, selling the business or closing it down. Here’s what might lie ahead.

1. Find a successor

If you hope to leave your business to a successor, “build a team early on that can carry on the business,” says Keith Schiller, a retired attorney who specialized in business succession and now advises entrepreneurs with business mentoring organization SCORE.

You may go into your business with partners, anticipating from the start that one will run the business someday and creating a buy-sell agreement to clearly define the transition.

“If you have two or more partners or shareholders, you should be thinking about succession on Day One,” Schiller says.

Or you might identify employees who are interested in running the business and have the capacity to do it well. They can learn on the job and develop relationships with your clients and business partners, giving you confidence that your business is in good hands.

If any family members are next in line, the process requires extra sensitivity.

Schiller recommends consulting not only your accountant and banker, but also a life insurance agent and an attorney who has experience in business succession. You can even seek out a family dynamics consultant, who can help address the personal and financial complexities between family members during a business succession.

“I see families disintegrate when the powerful principal owner dies,” Schiller says.

2. Sell the business

If you don’t choose your own successor, another option is to sell the business to someone who will continue operating it.

“If a company has ongoing income and cash flow, there’s a buyer somewhere,” Tramontano says.

There are three categories of business buyers, Tramontano says: employee successors, who already know the business and want to try their hand at operating it; strategic buyers, who can add your business to a portfolio and realize efficiencies; and competitors, who can expand their footprint in your market.

“Generally, the strategic [buyer] is the one that can pay you the most, because they can get synergies from operating efficiencies,” Tramontano says.

A business broker, especially one who specializes in your field, may be a helpful resource in valuing your business, finding a strategic buyer and negotiating a sale.

That doesn’t mean the strategic buyer is always the right choice, though — especially if the buyer doesn't align with your values.

“Maybe there’s an entrepreneur who’s been serving the community for a long time, and they want to make sure that the business stays open and stays available for the community,” Tramontano says.

3. Close the business

Schiller closed his law practice when he retired several years ago. He hadn’t found a successor prepared to take it over, and no potential buyer felt like the right fit. “It was a control issue,” Schiller says, because he had a specific vision for the business.

Instead, Schiller spent the last years of his practice referring his clients to other attorneys. When he retired, he liquidated the business.

This was possible in part because he could afford it, Schiller says — he wasn’t relying on the business’s value to fund his retirement.

To give yourself this option down the road, start by creating a self-employed retirement plan and investing a portion of your income there. That will help you build a nest egg, just as you’d have with a company-sponsored retirement plan.

“Start as early as you can,” Tramontano says. “The better you plan, the more options you have at your disposal.”

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