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Letting go: Why is retirement so hard and how can we make is easier?

By Danielle Walsh

With a little planning to ease potential conflict and uncertainty, ‘retirement’ can reclaim its rightful status as a positive word—even for small-business owners.

Many business owners spend decades building their operation, spending countless hours strategically planning and budgeting, managing inventory, and handling employee matters (all while simultaneously putting out all sorts of everyday fires). In my many years working as a family business advisor and chartered professional accountant (CPA), however, the one item I have seen countless clients ignore or resist is retirement planning.

Retirement: A bad word?

Why do so many business owners consider the word ‘retirement’ to be so off-limits? I have lost count of the number of clients who, when asked about their plans for the future, have said to me, “Shhhh, don’t bring up retirement—I’m not ready yet!”

Like it or not, retirement, especially in a family business, needs to be planned many years in advance. Unfortunately, the process can introduce a range of unpleasant emotions.

Indeed, some who are nearing retirement age feel as though they are being pushed out of the workforce and will no longer play a role in the business they started and/or grew over decades. For many, their entire identity, social network, and life has been tied to their career, which makes leaving feel unimaginable.

After 30-plus years of blood, sweat, and tears, do we not all deserve to be sitting on a beach with perfect weather and a drink in hand? Certainly, but only if this is your definition of retirement! Over the years, I have discovered (to my surprise) this is not how many business owners picture their golden years. I have several clients in their 80s and 90s who still go into work on a regular basis, as this is truly what makes them happy.

While this perception of retirement might seem a bit unconventional to you or me, experience tells us if one does not accommodate the definition of retirement as each founder or business owner sees it, these professionals will never feel able to retire or relinquish control of ownership. The next generation of operators will never win this battle. Attempting to push out owners is not a feasible exit strategy or succession plan; in my experience, the only losers in these scenarios are the next generation.

Of course, compounding these feelings is often a lack of clarity surrounding what retirement can or will look like, as well as what the departing owner can expect from the business from a financial perspective.

The money of it all

Founders and business owners who are considering stepping down need some level of assurance that their retirement funds are secure. If they are no longer the ones making all the decisions and leading the boat, it can be difficult to feel comfortable retiring to a beach as opposed to remaining in the board room. This uncertainty is amplified when clear exit strategies have not been outlined in advance, leading to uncomfortable negotiations and conversations many owners would prefer not to have.

A lack of answers

Another reason outgoing business owners may avoid retirement planning (or doing what I call the ‘ostrich’—sticking their head in the sand and ignoring the subject) is simply because they do not have the answers to some key questions they are being asked. These might include:

• “When are you stepping down?”

• “Who will take your place?”

• “What role will you have moving forward?”

• “How much will your salary be?”

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• “What about ownership? Will the business be passed along to your children equally?”

Indeed, broaching the retirement conversation is often synonymous with opening up a can of worms, so why bother?

My answer to this question is always the same: spending decades building and growing a business, doesn’t one deserve to enjoy retirement as they see it? Whether this means working two to three days a week or no days a week, a business plan should be able to accommodate these desires as best as possible.

The aforementioned concerns (e.g. being pushed out, having a different definition of retirement, worrying about finances, etc.) can all be handled through proper planning, beginning with a comprehensive succession or transition plan with clear and pre-determined exit strategies. In order to put a plan in place, we must be brave enough to talk about retirement and letting go.

Accommodation and service contracts

To begin this planning process, the next generation of business owners must be willing to do their best to accommodate whatever the outgoing generation desires as their retirement. If this does not happen, it is highly unlikely the older generation will retire or relinquish control of the business.

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Proper planning beginning with a comprehensive succession plan with clear and pre-determined exit strategies can alleviate these concerns.

My clients in their 80s and 90s who still choose to work are no longer owners. Most have an established set of family business rules with a mandatory age for retirement from ownership (assuming there are other competent owners). This means they have passed along the ‘ownership baton,’ but continue to work in an agreed upon capacity that is clearly documented in a service contract. This document outlines the role and responsibilities, compensation, hours or days of work, and any other pertinent information.

 

Establishing terms of employment for retired owners who wish to continue working is key to ensuring they feel comfortable moving forward. This contract serves as a comfort to a retiring owner, as it assures they can continue to do what they love and have the retirement they desire without having to hold on to ownership forever. Likewise, they do not have to worry about feeling pushed out of their own business.

Additionally, in most cases, a service contract cannot be changed without the retired owner’s permission, providing comfort they will be able to continue to work as they please with clear compensation and expectation. This allows the older generation to remain active and act as a mentor/advisor to the younger generation.

Exit strategies

Establishing pre-determined strategies for all type of exits (e.g. death, incapacity, retirement, etc.) is crucial to the long-term success of a business. While retirement is an achievement that should be celebrated and enjoyed, this is often not the case in family businesses when a plan is not in place.

Indeed, in these scenarios, the negotiations commence late in the game, which can be a very painful process in cases where parties involved have a different idea of what the future of the business looks like. What’s more, whatever is done for the first retiring owner often sets a precedent for future generations, whether it was a sound plan or not.

In comparison, knowing in advance what to expect and what steps will be taken to ensure a seamless transition of ownership helps transform ‘retirement’ into the good word it should be. Further, pre-determining the terms and conditions for all owners means the process is no longer a personal negotiation plagued with self-interest. If an ownership group can agree to this before anyone nears retirement, all parties will likely agree to terms which are reasonable for the business, as well as for the retiring owner. This means all parties can retire in a manner they desire—one which can be celebrated instead of creating conflict and uncertainty.

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What should be pre-determined?

When drafting a retirement plan for business owners, there are many aspects that should be considered.

Mandatory retirement age

With respect to retirement of ownership in a family business, the first item that should be established is whether or not a mandatory age of retirement will be implemented. While an owner’s age of retirement may vary depending on the needs of the business, the idea is to force a rotation and make room for the next generation to ascend into ownership and allow the older generation to act as advisors or mentors.

To be clear, retiring from ownership at, say, 65, does not mean these retired owners will cease working five days a week into their mid- to late-80s if that is what they desire. As one of my clients put it: “The only good reason to hold onto ownership beyond our proposed mandatory age would be because you want to accumulate more equity/value from the continued growth of the business. Yet, you have had all your working years to achieve financial security, and should not burden the next generation for your lack of financial planning.”

Valuation methodology

Once a partner hits the pre-determined mandatory retirement age, what will they get for their ownership? How is this determined? Valuations are one of the more contentious issues in business relations, and family business operators should give much thought to the methodology they adopt.

When someone retires from ownership, I recommend paying them fair market value for their role—the value of their shares is likely to act as their pension plan, and they should receive the full value of their years of hard work and sacrifice. To achieve this, the method in which the value will be determined should be clear.

Consider the following:

  • Will the company’s value be determined by an internal accountant or external accounting company?
  • Will a formal valuation be completed by a chartered business valuator (CBV)? If so, what kind of valuation will be obtained—calculation, estimate, or comprehensive?
  • What if all parties do not agree with the valuation?
  • What base assumptions will be used for the valuation (i.e. will goodwill be included, will a discount be applied for a minority owner, etc.)?

All of these items must be agreed to by all parties before a valuation is needed (and, ideally, before anyone plans on retiring from ownership).

The methodology chosen can vary from business to business, but the important aspect is ensuring all owners clearly understand and endorse how the value of their ownership and, essentially, their retirement funds will be determined. This is not something one wants to negotiate last minute.

Payment terms and security

Will a retiring owner receive a lump-sum payment? Or payment spanning 10 years? Or 30 years?

Even after the business’s value has been determined and agreed upon by all parties, there are still plenty of outstanding questions that may pose stress. Again, the payment terms from business to business will vary, but the important part is to pre-determine the details.

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In a family business, it is common to establish extended payment terms. Retired family members will get fair market value for their ownership, but will likely act as ‘friendly bankers’ and allow the payments to be made over time. That said, everyone has their own definition of what is reasonable; without a clear-cut manner to determine this, one party might be thinking five years, while their business partner might have an expectation of 15 years.

For this reason, it is wise to outline ranges for payment in advance (e.g. $1 million to $3 million will be paid over five years; $3.1 million to $5 million will be paid over 10 years; etc.). While feasible payment amounts will vary depending on the business, it is, again, much easier to determine this before anyone is in the position of needing to collect these funds.

Once a timeline has been outlined, it must also be determined whether an interest component will be tied to any outstanding debit (and, if so, what the rate will be tied to). I generally advise my clients to tie this rate to the Consumer Price Index (CPI).

Likewise, it should be determined what security (if any) will be provided to the retiring owner for any outstanding balance. Most of my clients agree to a general security agreement protecting the debt of retiring owners (after any loans or amounts owing to the bank, of course).

A cohesive succession plan

With a little planning to ease potential conflict and uncertainty, ‘retirement’ can reclaim its rightful status as a positive word. To achieve this, owners need to consider what letting go of their business will ultimately look like, with the understanding that, even if they relinquish ownership, this does not mean they cannot continue to work as they please in the business they built. Indeed, they should be delighted to transition into the role of advisor and trusted mentor to the next generation!

This process becomes easier when a comprehensive succession plan addressing all of the questions posed throughout the article is outlined and agreed to by all parties. Keep in mind: once agreed upon, these ideas would form part of a comprehensive shareholders agreement, legalizing pre-determined exit strategies.

It is never too late to start putting the pieces together. Whether your retirement is spent in the boardroom, on the beach, or somewhere in between, this is an era of life that should be celebrated and enjoyed.

Danielle Walsh is founder of Walsh Family Business Advisory Services, a consulting company specializing in helping family-owned and operated businesses navigate management and ownership succession. She is a chartered professional accountant (CPA), chartered accountant (CA), and holds certificates in family business advising and family wealth advising from the Family Firm Institute (FFI). Walsh developed her philosophy and desire to help family businesses from her father, Grant Walsh, who has worked as a family business practitioner for the last 25 years. She and her father recently published a book titled A Practical Guide to Family Business Succession Planning: The Advice You Won’t Get from Accountants and Lawyers. Walsh also currently teaches the first family business course offered at the undergraduate level at Carleton University in Ottawa. She can be reached via email at danielle@walshfbas.com.

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