March 21, 2023

Small-Business Guide: Sell a Business to Cover Retirement? Don’t Count on It

Still, he did not realize just how much of a toll running a business would take on his personal finances. For four years, Mr. Lewis, the founder of eHealthcare Solutions, an online advertising network that is based in Ewing, N.J., and represents health care Web sites, took home about $20,000 a year and had to deplete his retirement savings account.

“It was draining to watch that savings go down,” he said.

But as soon as he was able, he started saving again. Unfortunately, many business owners never reach that point. One study found that 40 percent of business owners had no retirement savings. For many reasons, saving for retirement is difficult for owners, but perhaps the biggest mistake many make is assuming that they do not need to save — that one day they will sell their businesses and live off the proceeds.

Many businesses simply cannot be sold, and others end up being sold for far less than expected, said Randy Gerber, founder of Gerber L.L.C., which helps business owners manage their personal finances. And even if a business can be sold, he said, owners often have an unrealistic notion of how much it might be worth. That is why a potential sale should not be an owner’s only plan for retirement.

PLAY IT SAFE By definition, business owners take a lot of risk in their professional lives because much of their net worth is tied up in one asset, typically as much as 65 to 85 percent, according to Rob Pettit, a high-net-worth planner at TD Wealth.

For this reason, they are often advised to follow two rules with the money they manage to save: invest conservatively and diversify. Following that advice, however, does not come naturally to all business owners. Many are eager to invest in stocks and do not want to consider fixed-income securities.

When Mr. Lewis started investing in the stock market, he bought mostly health care and pharmaceutical companies, industries he is exposed to through his business — a common mistake.

“It seemed to make sense for me to invest in health care because I know it so well,” he said. “Most of my business is tied up in that sector.” He eventually realized that it would be wise to change that approach, and he now owns shares in technology, oil and gas and financial companies.

Mr. Gerber, whose financial management firm is based in Columbus, Ohio, said he believed that assets that are liquid, have low volatility and generate income were generally an entrepreneur’s best bet. Many of his clients own corporate bonds that can either be sold quickly or held to maturity, and mutual funds that invest in equities and pay dividends. He avoids mutual funds that invest in bonds, he said, because when interest rates rise, they lose value.

CUT YOUR OWN PAY? When times get tough, many owners stop saving for retirement. They either forgo salary altogether or reduce their pay. That can be a mistake, said Ellie Byrd, founder and chief executive of ForumSherpa, a business based in Atlanta that offers executive leadership and training courses.

Ms. Byrd used to run a software training company. In 2000, she stopped taking a salary, and a year later, she found herself $500,000 in debt. With no income, she could not contribute to a savings plan — or pay her bills. When a business struggles, deciding not to pay yourself may seem a natural reaction, but it can obscure larger issues.

In retrospect, Ms. Byrd says she believes she should have laid off staff members and made other adjustments before stopping her own pay.

Mr. Gerber said owners should stop saving only if it is clear the business can be turned around. If not, there probably are bigger problems, and stopping saving isn’t going to solve them. “You often have to do some real soul searching to figure out why the business is struggling,” he said.

Of course, there are times when it makes sense to hold off on saving personally to invest more in the company. In these instances, Mr. Gerber said, the business should be running smoothly, and the investment should promise a healthy return. He likes to see an investment, like a new piece of equipment, generate a return that is three times greater than can be gained in stocks or bonds. If it cannot do that, he advises putting the cash in a personal account.

BUY THE BUILDING Although Lenny Verkhoglaz invests in an individual retirement account, he thought he should hold more than just stocks and bonds in his overall portfolio. In 2006, Mr. Verkhoglaz, the founder of Executive Care, which is based in Hackensack, N.J., and provides in-home health care to the elderly, bought the building that holds his offices.

When he retires, he plans to sell his company and the building together. He holds the building in a separate company for rent-related purposes but thinks he will get a better price by selling the two assets together. “If I sell the company without the building,” he said, “the value of the real estate may go down if the company moves out and another tenant doesn’t take its place.”

Even so, Mr. Gerber suggests keeping ownership of the company and the building separate. That makes it possible to sell the company and keep the real estate, collecting rent from a new occupant. A separation can also limit liability, Mr. Gerber said.

There is another advantage to owning your own building: you do not have to deal with a landlord, rising rent of eviction threats. And you have a dream tenant: yourself.

KNOW YOUR BUSINESS’S WORTH If selling your business is any part of your retirement plan, Mr. Gerber said, it is essential to know what your business is worth. And it is important to start tracking its value long before you plan to sell.

Mr. Gerber suggests hiring a professional who can figure out the current value of your company. Then determine how much money you will need to live the lifestyle you want. Most important, think about whether you will be able to increase the value of your business enough to match that retirement number.

At age 43, one of Mr. Gerber’s clients decided he wanted to retire at 50. To do so, he determined, he would need to build his business to $20 million in revenue from $10 million. Doing that meant finding new channels to sell his products. It is working, Mr. Gerber said, but if not, he would have to think about retiring later. “It’s about the math,” he said. “It needs to be clear.”

Business owners also must be prepared to sell early if their business or their industry starts to slip. Another of Mr. Gerber’s clients was in a sector that was consolidating quickly. She received an offer on her business that was far less than she believed it was worth, but she decided to take it, knowing that it would be tough to compete against the big players beginning to dominate the market. “If you think the number will get worse and not better,” he said, “then get out when the getting’s good.”

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Bucks Blog: Generation X Hit Hardest By Recession

Members of Generation X, now in their late 30s to late 40s, were especially hard-hit by the recent recession, and are at risk for downward mobility in their retirement years, a new report finds.

Generation Xers, the group of Americans following the Baby Boomers, lost nearly half of their overall net worth between 2007 and 2010, according to a report from the Pew Charitable Trusts.

Generation Xers lost an average of about $33,000, reducing their “already low” relative levels of wealth, the report found.

While Gen-Xers saw greater increases in wealth from home equity during the housing boom, they have lower overall rates of home ownership compared to earlier generations, which mutes the impact on the wealth of their group overall, the report found.

The report defined Generation X as those born between 1966 and 1975, so they now range in age from 38 to 47.

By comparison, both early and late baby boomers also were hurt by the recession, but to a lesser extent, losing 28 percent and 25 percent of their median net worth, respectively.

Gen-Xers also have higher levels of debt than other age groups, the report found.

The upshot is that based on the analysis, Gen-Xers will only have enough at retirement to replace about half of their pre-retirement income, if they retire at age 65. Financial planners typically suggest that retirees should be able to replace at least 70 percent of their annual income, through savings and accumulated wealth.

Early baby boomers — those born between 1946 and 1955, who are currently 58 to 67 years old — appear on track to replace between 70 to 80 percent of their income, in contrast to the age groups that follow them.

Late boomers, born between 1956 and 1965, are also less well-prepared for retirement than earlier generations, the report found.

The report is based on data from 1989 through 2010 collected by the Federal Reserve Board and the University of Michigan.

“As policymakers focus on Americans’ retirement security, particular consideration should be paid to how younger generations of workers can make up for these losses and prepare for the future,” said Erin Currier, director of Pew’s Economic Mobility Project, in a prepared statement.

Are you a member of Generation X? How are you saving for retirement?

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Bucks Blog: Politicians and Their Personal Finances

For this weekend’s Your Money column, I tried to profile the poorest members of Congress in all the land. Given the limited financial disclosures that our elected representatives must make, which the Center for Responsive Politics does a nice job of collecting in one place, it’s hard to say for sure who has the lowest net worth.

But Representative Joe Walsh, who is in a tough re-election battle, is probably among the poorest. He has also had his personal finances laid bare in the last couple of years. Chicago-area reporters have revealed tax liens, driver’s license suspensions, a child support dispute, a foreclosure and other issues.

At what point should politicians’ financial troubles keep you from giving them your vote? Should a single foreclosure be disqualifying? An accusation of being behind in child support payments, even one that is later resolved, as Representative Walsh’s was? And is a pattern of such problems over time evidence of a kind of irresponsibility that simply goes too far? Or is it a sad sort of behavioral problem that may not transfer into how someone would handle the public’s money?

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Media Decoder Blog: As Consumers Tighten Belts, Advertisers Adjust

The economic downturn and high rates of unemployment have forced consumers to spend less, and advertisers have taken notice. Figures from Nielsen, to be released on Monday, show the amount of money that advertisers are spending to bring their message to consumers has increased in certain categories.

For the first half of 2011, according to Nielsen, advertisers spent $53.2 billion on television, radio, newspaper and magazine ads, 5 percent more than the same period in 2010.

The three categories showing the highest increases were automobile insurance, which increased 25 percent from the first half of 2010 to $955 million, from $766 million; bank services, which increased 24 percent to $566 million, from $457 million; and financial investment services, which increased 19 percent to $550 million, from $463 million.

“The theme that I see here is that they are all financially oriented categories,” said Randall Beard, the global head of advertiser solutions for Nielsen. “People are very interested in saving money, getting the best possible deals and making sure their financial situation is as strong as it can be.”

Ads for auto insurance tended to focus on savings and discounts, Mr. Beard said, while ads for bank services highlighted rewards and offers for products, and financial services ads emphasized investment and retirement security.

Advertisers in the auto insurance category are looking to attract new customers, he said. Financial services companies that previously concentrated on advertising to customers with a high net worth now try to attract all customers who are seeking retirement planning products, he said.

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Economix: C.E.O. of the U.S.A.

The job of the president is technically that of the chief executive of the United States. But I’m still fascinated by the extent to which business acumen is being emphasized by the early presidential contenders.

Newt Gingrich, small-business man, on Chris Usher/CBS-TV, via Associated PressNewt Gingrich, small-business man, on “Face the Nation.”

“I think I have proven I can manage money,” Newt Gingrich said Sunday on the CBS News program “Face the Nation.” “As a small-business man I run four small businesses. They have been profitable. They’ve employed people. This is the opposite of the Obama model.”

And here was Donald Trump, back when he was toying with a run: “I’m a much bigger businessman and have a much, much bigger net worth. I mean my net worth is many, many, many times Mitt Romney,” Mr. Trump told CNN’s Candy Crowley. “Mitt Romney is a basically small-business guy, if you really think about it. He was a hedge fund. He was a funds guy. He walked away with some money from a very good company that he didn’t create. He worked there. He didn’t create it.”

Mr. Romney, of course, has emphasized his record as head of the private equity firm Bain Capital: “My experience, my history is in turning things around. I will get America on the right track again.”

I do wonder how smoothly business executive experience translates to being president of the United States. There is a very different set of stakeholders to please and negotiate with. The budget issues are quite different, too, and not only because the federal government can print money and businesses can’t.

To some extent “big business” has been vilified in the last few years, in part because of the financial crisis and in part because there has been so little hiring even as profits soared. So whatever its actual relevance to qualifications for the presidency, it will be interesting to see how effective the “I’m a big-business man” rhetoric is with voters. Presumably this has already been focus-grouped.

Note that the last time this became a major talking was in the 2000 presidential campaign, when George W. Bush’s business experience — and his M.B.A., as he became the first president ever to hold such a degree — was cited as evidence of his facility with fiscal constraint.

I’ll let readers come to their conclusions about how accurate that projection was.

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Money Through the Ages: Finances That C.E.O.’s May Not Be Watching: Their Own

REGINALD K. BRACK JR. graduated from Washington and Lee University in 1959 and headed west to St. Louis to take a job selling advertising for The Saturday Evening Post. Three years later, he was sitting on an airplane and struck up a conversation with a man who turned out to be the publisher of Time Magazine.

“A lot of life is serendipity,” Mr. Brack said of that seat assignment.

But then came the hard work. Mr. Brack was recruited to join Time a few months after that flight, and he stayed there for the next 37 years. In 1986, he was named chief executive of Time’s magazine division and chief executive of Time Inc. in 1990. He retired as chairman in 1997 and stayed on for two more years as nonexecutive chairman.

Mr. Brack’s rise through the corporate ranks was a classic self-made-man story — his father worked in the airline industry in Dallas — and it was also accompanied by great wealth, in salary and stock. Yet even though his earnings increased over the years, he said he paid little attention to it. Now in retirement, he is faced with some choices.

As a member of Tiger 21, an elite investment club, he has at least its minimum of $10 million — the net worth that currently makes a married couple subject to the federal estate tax — but he does not want to say how much he has beyond that amount.

“I don’t have near the wealth people think I do,” he said. “I’m certainly not poor, but I don’t count myself as a great, wealthy American.”

Mr. Brack would rather talk about his working years than money any day. He was the first person to run the company who had not gone to an Ivy League college and also the first chief executive who started his career in sales, not journalism or finance. He also appointed the first female publisher at any Time magazine.

But now that Mr. Brack, 73, is working less, he has time to think about his wealth. He sits on several boards, including that of Fieldpoint Private Bank and Trust, which he helped found, in Greenwich, Conn., where he lives. But he is less busy than he was in his days at Time. Financially, he thinks about his cash-flow needs, his charity and his family; he is married with three grown children.

Self-made executives often delay wealth planning, said Sharon H. Jacquet, managing director in J. P. Morgan Private Bank, who runs a team that works with senior executives of public and private companies.

“Not thinking about finances until retirement is not uncommon,” she said. “Really successful C.E.O.’s put the priority on doing their job as a C.E.O. They have a comfortable lifestyle and adequate financial resources, and they don’t focus on it.”

In his professional life, Mr. Brack said he concentrated on work during the week and his family the rest of the time. This helped him be successful, but it also left him in his 70s with a seemingly diffuse financial plan.

Early on, he started with an adviser in Allentown, Pa., who persuaded him to sell some of his high concentration of Time Warner stock ahead of his retirement. This diversification helped Mr. Brack, and he remains loyal to his adviser.

Mr. Brack chose the Royal Bank of Canada to create his municipal bond portfolio after a search many years ago to determine which firm had the top muni management team. He credits that part of his portfolio with helping him sleep during the financial crisis. “I was frightened, but I was comforted by that muni bond portfolio,” he said.

His third adviser, after the team at the Royal Bank, works for Fieldpoint Private Bank and Trust and counsels him on estate issues, equities and new managers.

While three advisers may seem like too many cooks in the kitchen, Ms. Jacquet said it could work if one of them had the entire financial and legal picture, even if someone else was managing the assets. Mr. Brack said Fieldpoint has the full picture of his finances.

Estate planning is crucial for Mr. Brack and his wife. When they die, there will almost certainly be money left over. But they do not have so much that he feels comfortable taking advantage of the generous gift tax exemption of $5 million per person that is in effect for the next two years. (This is separate from the annual gift exclusion of $13,000.) “That would be a serious diminution to our lifestyle,” he said.

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