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Have you ever thought about how you might transition from business owner to retiree? Most entrepreneurs are very comfortable with the risks they are taking in their business, but how will you know how long should you keep taking those risks, and when is it time to sell? How much is your business worth? What is the magic number you would need in order to provide ample liquidity to support your retirement needs?

Most people would like to retire at some point in their lives; however, instead of having significant risk in focused concentrations, it will be best for them to be liquid and diversify both their income and their investments, as the graphic below displays. Ideally, over your lifetime, you could set aside large amounts of money each year for retirement in order to buffer losses from risky investments , but in reality this can be difficult to do, especially when you are growing a successful business.

Daniel Graff2
Simply put, high risk concentration in the proper environment can create wealth, but that high risk environment also puts you in a highly illiquid and dangerous position if you don’t exit at the right time. This is an “impossible situation” for all entrepreneurs. As Henry Ford said, “Don’t save every nickel. Invest in yourself”. Mr. Ford’s real success came after the age of 45 when the Model T came out, and prior to that point he used much of his hard earned money to invest in his ideas.

As a business owner your risk picture looks like the triangle on the left, with large concentrations of risk and illiquidity. Ideally you will transition to a risk picture much more closely represented by triangle two on the right, as you get closer and closer to your desired retirement age. Over time, you will increase the concentration of moderate and conservative investments that will provide stability and diversification in retirement, allowing you to use it for income generation and stable cash flow.

There are four good rules of thumb to help you keep the retirement picture in check while you’re running your business:

  • Know your limits
  • Consider some investment risk transition over time
  • Think realistically about who might take over your business
  • Formalize an Exit Plan

Know Your Limits

I was recently talking with a successful business broker about several transactions he had been involved with, and why people were selling their businesses. One story in particular really caught my attention. It was a story about a makeup business that hosted classes and artistry, but also had their own product line. While this was quite interesting, it wasn’t the nature of the business that caught my attention. What caught my attention was the reasoning behind the business owner’s decision to sell a profitable and growing business.

The business had fantastic reviews, had extremely good cash flow and profit margins, and the owner was fairly young. Why would anyone in that position sell? This business owner, being more honest with himself than most, didn’t think he was the best person to take the business to the next level. He had an extremely successful business that he knew would be attractive to buyers, and because he didn’t have a clear vision of how to take the company to the next level he decided it was best to move on.

This individual understood that in business “if you’re not growing you’re dying”, and while his business was extremely successful, he felt he had done what he could to contribute to its success. It is vital to be aware of this, and to consider changing the dynamic of your risk through the liquidity event that follows. There is always an opportunity to start again, and create something new, so don’t be so attached to your business that you feel you have to be the solution for every issue. You might need to hire, and you might need to sell in order for the business to truly flourish.

Will you be brave enough to admit when moving on might be the best option for you and your business or are you too attached to your small business to admit you may no longer be the best captain of the ship?

Consider Some Investment Risk Transition Over Time

If you are still growing and innovating in your business you may benefit by setting up a retirement plan. You can often increase your long term liquidity and minimize risks through diversified investments and regular contributions. Whether you set up a SIMPLE plan, a 401k, a Cash Balance plan, or an IRA you are at least able to get a start setting aside tax free money for your future and increasing the diversification you have away from your business.

Making regular contributions to these types of retirement account investments, or even to a simple individual investment account can be very important over time, as it allows you to spread out your risk, buying as the market fluctuates. Regular contributions actually increase the safety of your investment because you aren’t buying all at once, and if the market takes a step backwards, you will continue to buy at relatively low prices. Though you may lose some money on what you already have invested during a temporary dip, the market will recover, leaving you with a lower average cost per share and more money.

If you decide to sell a business early in life, it may be good to take a few “chips off the table”. You may very well want to invest in a new business, but it’s often prudent to use only a portion of the lump sum to re-invest; another high-risk, highly illiquid business venture demands greater caution. By setting aside a portion, you take a few of your eggs out of the risk basket and increase protection for a portion of your portfolio. While high risk concentration can create wealth, it can be extremely dangerous for business owners; diversification creates safety by allowing you to have investments spread across different sectors, countries, and asset classes. If you are able to create wealth through a business, it is important to have a means of protecting that which you have created.

Think Realistically About Who Might Take Over Your Business

Is it your kids, your internal manager, a private equity firm, or another individual who likes what you do? A friend I met recently was offered an opportunity to take over his father’s company, and to some that would sound like a great opportunity, but not to my friend. He had a completely different idea about how his future would pan out. The problem was that dad was now in a pickle with a business and no transition plan. These issues are all too common. The majority of business owners don’t realize that:

  • Most internal managers don’t have the capital to buy their business.
  • Most kids don’t want their business.
  • Most businesses aren’t prepared for another individual or firm to take over.


A business manager is a very logical transition from the standpoint of knowing your business and how it runs, but that manager may not be in a position to be able to pay you for your business up front. Most internal transitions end up being a buyout over time. Because the payouts are lengthened, and any up-front payment is likely to be non-existent, it may not work for the seller. In the event there is a financially independent family member, a loan, or the seller is not dependent on immediate liquidation for stability, it is possible a scenario like this could work; however, you as the seller must know what will and will not work for you in terms of liquidity and selling terms.


Many business owners assume they will be able to pass their business on to their children, but often this happens without the proper forethought. All parents want to see their children succeed, but it can be a challenge to decide if they are really the most suitable candidates for your business. The first question is, “does my child want to run this business”, and the second question should be, “does my child have the drive and necessary skills to succeed in this line of work”. Sometimes it is very difficult to be objective with these types of decisions, and to do what is best for both your company and your children. Be sure to start conversations with your kids about your business early, so that a plan to move forward can be routed, based on whether or not the kids want to (or can)take over the business.


Just running your business is hard enough, but you likely need to be planning not only for your day to day business, but a long-term business sales strategy. When another business or individual is contemplating the purchase of a small company, this is often the toughest part. They want to see a company, where they can step in, have quick success, and use their expertise to take the business to a new level. If you are the face of your organization, run every department, are involved in every decision, and provide 60% of the sales revenue, it is unlikely they will be able to acquire your business and have success quickly. This will decrease what they are willing to pay for your company.

There are several ways to increase your ability to remove yourself from the day to day activities. Clear records, and the ability to have your business run without you are the primary keys to transition. Increase your ability to be the head coach instead of the quarterback on the field. The better you are able to do this, the better your team will be at solving problems, and the more comfortable they will be in those roles. Increasing the length of your vacations over time can be a fabulous way to test how well your company functions without you.

You can’t change the dynamic of your risk unless you can liquidate your business, so having a plan to do so is vital to your long term success!

Educate Yourself Regarding an Exit Plan

Knowing what you need to know is often half the battle, and you can’t get too far without finding out what fits into the equation. In a day and age when computers are taking over the world, they still can’t do it all. Many of the most important components of planning for your exit of a small business are qualitative in nature, and working with an individual who has helped people through that transition can often be a great benefit. If you own your own business, you would certainly benefit from the following:

  1. Speak with a well-connected Certified Financial Planner about a game plan for turning your assets into an income source.
  2. Know the amount of income you need in retirement
  3. Evaluate the stability of your income sources (social security, pension, rental income, business payout, investment portfolio)
  4. Have an understanding of “Your Number” (your investment portfolio need)
  5. Evaluate the types of risks you are comfortable with in retirement and the associated consequences.
  6. Know that you are ready to let go of the business you have created, and understand the differences retirement may bring to your lifestyle.
  7. Keep a good relationship with your accountant – keeping very clean records is a must. (If you are not paying an accountant, and you are running a reasonably successful business, it would be a good idea to start).
  8. Start at least 2-3 years in advance of the sale to begin working through the above actions, and contact someone qualified to help you work through the sale, the legal work, and the negotiations.

Daniel Graff is a Director of Financial Planning at Weatherstone Capital Management, a money management firm that utilizes active money management strategies that are designed to generate strong returns while reducing the level of risk that is found in most stock and bond market investments.