Want to help business owners plan for retirement?
In addition to financial expertise, you’ll need plenty of time, patience and empathy, says Joel Guth, president of Gryphon Financial Partners in Columbus, Ohio.
“Most owners think of their business as their bonus child,” Guth says. “They have spent 60 to 80 hours a week with their business for decades. Retirement planning is obviously about the financial aspect, but the emotional element for business owners can also be huge. For many, it’s like selling their baby.”
The more time that owners can spend preparing for retirement, the better, says Guth, who has specialized in working with business owners for over two decades.
“We had a client who was the sole owner of a construction firm and wanted to retire in his early 60s,” Guth says. “It turned out there were issues with his estate, and in order to avoid estate tax, the process took much longer than he anticipated. Giving yourself a three-year window is much better than trying to get it done in the next six months.”
PICTURE LIVING IN RETIREMENT
Gryphon, which dubs its planning system for business owners “The Next Mountain,” starts by asking owners about their goals for retirement. “We want to know what they envision their life to look like,” Guth says. “This is used as the framework through the entire process. There have been many times I have had to push back and remind clients what their goals are.”
Developing a plan is the next step.
Does the owner want to sell the business outright, transition to a family member or sell to a group of key employees? That decision will have an impact on how much owners will receive for the business, and what their subsequent tax liabilities will be.
“After that, a lot of cash flow planning needs to be done,” Guth says. “How much surplus capital will there be, and what is the tax burden? What are their cash flow needs to support their retirement? Financially, this drives everything else.”
LINE UP HELP
Gryphon then works with clients to select key outside advisors and make early planning decisions.
If owners are selling outright, selecting the best investment banking team is critical.
Quote“Retirement planning is obviously about the financial aspect, but the emotional element for business owners can also be huge,” says advisor Joel Guth.
“You want owners to get a realistic sense of what their business is worth,” Guth says. “It’s like working with a real estate agent. Pick a banker who knows your market, not one who gives you the highest sale price.”
In addition, a client might need a consultant to help manage an internal transition, and estate planners should be on hand to work on tax-saving strategies. It also helps to have a list of philanthropy consultants available for clients who want to develop charitable giving plans.
‘A HUGE PSYCHOLOGICAL JUMP’
Advisors also need to develop post-exit investment management strategies, says Guth.
“How a business owner funds his retirement lifestyle from a liquid portfolio is going to be very different than income from running a business,” Guth says. “It’s a huge psychological jump for most owners to give up that control, and we give them as much education as we can on volatility and risk.” That means warning clients that they’ll lose money when the market falls, he says.
After one of Gryphon’s clients sold his company, he lost more money in the stock market in one quarter than he took out of the business in a typical year. “Stretching a client’s time horizon so they don’t equate market volatility with a permanent loss is really critical,” Guth says.
When the time comes for the actual sale of a business, Gryphon makes sure to refer clients back to the articulated goals they have set for themselves, their family and their employees.
“If it’s a third-party buyer, we sit in the actual meetings and help the owner make the decision on whom to sell to, always reminding them of their objectives in retirement,” Guth says. “If it’s an internal transition, we’ll ask what kind of GRAT [Grantor Retained Annuity Trust] or note is going to be utilized.”
Finally, advisors need to make sure owners have realistic expectations of how they’ll want to spend their time in retirement.
“After one client sold his company, he moved south and lived out his dream of playing a lot of golf,” Guth recounts. “He was 55 years old, and we warned him that he might miss running a business. After two years of playing golf, he was bored out of his mind and said, ‘You were right.’ We then found a consultant to help him buy another business.”
In other words, sometimes the best retirement plan for a business owner who loves to work is to keep working!