Retirement for entrepreneurs: Should you stay on at your business or let go?

“Retirement” is a word that sends chills up many entrepreneurs’ spines. The idea of giving up control of a business you’ve nurtured and grown can seem inconceivable. But health, family obligations and changing priorities can raise questions about what you want your retirement to look like. Do you want to stay involved in the company? Pass the baton to the next generation or someone you’ve groomed to take over? Or would you prefer to sell or close the business?

This is a very personal decision, and there’s no wrong answer. “No one can tell you what’s best for you,” says Judith Anderson, senior vice president, Retirement & Personal Wealth Solutions at Bank of America.

Staying on

Remaining involved in your business in a more limited capacity will allow you to continue harvesting income from it and stay connected to colleagues without the pressure of running the show. Many entrepreneurs find it rewarding to shift away from day-to-day responsibilities to provide higher-level oversight, coming in as an occasional troubleshooter or consultant for the business. “Just eight to 10 hours a week might be enough to keep you engaged,” Anderson says.

The drawback of this arrangement is that you’re no longer the boss and you may not have the final say in decisions. Additionally, the financial rewards of selling the business are postponed, which may limit your freedom to pursue activities, like travel, whenever you want — and for as long as you want.

Passing the baton

Many entrepreneurs hope to transfer their business to a family member when they retire as a means of creating a legacy for the next generation. If this is your goal, discuss it with potential successors early on to make sure they are fully on board with your vision.

While creating a generational family business can sound appealing, there are potential pitfalls to consider. Conflict can occur within the family if more than one family member wants to take over, and resolving such disagreements could take up lots of your time and attention. In addition, your successor might not have as much aptitude for running the business as you had anticipated. Identify potential successors early, so you can assess their capacity to lead the business before you turn it over. In some cases, owners find it is better to transfer the business to an exceptional employee who has both the aptitude for and interest in managing the business.

Transferring ownership of a business to a family member as a gift also could have financial implications: You may no longer receive income from the business, you won’t reap the financial rewards of selling it and you may have to pay a gift tax, depending on the value of the business. There also could be tax repercussions for your successor. Consult with financial and tax advisors for guidance, and with an attorney to ensure your wishes are reflected in your will.

Selling the business

Some owners prefer to sell their small business to a family member, employee, competitor or private equity firm. If you opt for this route, start planning well in advance. You will need to get your financials in order and should take important steps beforehand such as asking key employees to sign agreements and stay on after the sale. Such actions would give potential buyers confidence that the business will continue to perform successfully without you.

The sale of your business can help to finance living expenses, travel or a legacy for your loved ones — and there may be an opportunity to maintain ongoing income. Some owners who sell a business negotiate to retain ownership of the commercial real estate and lease it back to the company; others engage with the new owners as consultants for a retainer fee.

However, not all businesses are salable, and economic factors that are out of your control, such as a recession, may affect the valuation of your business. In addition, even if you prefer to receive the proceeds in one lump sum, you might find that your buyer will need to make payments over time.

Considerations when stepping away

Your finances today

Review your assets — including any real or anticipated proceeds from selling your business, as well as retirement savings, investments and income from Social Security payments — with your financial advisor to determine if it’s the right time to retire. In some cases, building up your savings and delaying Social Security payments for a few more years can help to ensure greater financial security in retirement.

Your ongoing financial obligations

Review your budget to make sure you can cover your monthly expenses with some combination of savings, retirement and investment accounts, and Social Security. Downsizing to less expensive housing and reducing other expenses may also make it possible to retire when you wish.

Knowing how you want to spend your time

Not all considerations are financial. Knowing what you want to do in the next phase of your life — whether that’s traveling, volunteering, visiting grandchildren or enjoying hobbies — will help you determine whether staying on or letting go is the best option for you.

There’s no particularly right way to transition out of full-time entrepreneurship. Careful financial planning will help to ensure you enter your next chapter on your own terms.