Let’s imagine you’re five years from retirement. You’ve spent 30 years building your business. You’ve run the numbers. You’ve talked with your accountant. Maybe you’ve even had someone estimate what the business could be worth.

And in your head, you have a number. Maybe it’s $2 million. Maybe it’s $5 million. Maybe it’s more. Regardless, you’ve started building your retirement plan around that number.

But there’s an important question you may not have asked: What happens if you don’t get it?

• What if the business sells for less than you expected?
• What if it takes two more years to find a buyer?
• What if the buyer wants you to finance part of the deal?
• What if the sale price looks great on paper, but taxes, debt, fees and transaction costs leave you with significantly less than you expected?

Those aren't just business problems. They're retirement problems. And the closer you get to your exit, the more important it becomes to understand what happens if the transaction doesn't go exactly according to plan.

The Number in Your Head Isn't the Same as Money in the Bank

One of the easiest mistakes for a business owner to make is treating an estimated business value as if it were already part of their retirement portfolio.

Imagine you have:

• $1.5 million in retirement accounts
• $500,000 in other investments
• An estimated business value of $3 million

In your mind, you have $5 million. And your retirement plan starts getting built around that $5 million.

But there's a problem. The business isn't cash. It's an asset that still has to be valued, marketed, transferred and sold. Until the transaction happens, that $3 million is an estimate—not $3 million sitting in an account ready to fund your retirement.

That doesn't mean your business isn't worth $3 million. It simply means there's a meaningful difference between: “My business is worth $3 million.” and “I have $3 million available to fund my retirement.”

The Sale Price Isn't Necessarily What You Keep

Even if your business sells for the number you've been expecting, you still need to ask another question: How much of that money will actually be available to fund retirement?

The headline sale price isn't necessarily the amount that ends up in your investment account.

There may be:

• Taxes
• Transaction costs
• Professional fees
• Outstanding business debt
• Other obligations associated with the transaction

And depending on how the deal is structured, you may not receive all of the proceeds at closing.

• Maybe there's an earnout.
• Maybe the buyer finances part of the purchase.
• Maybe a portion of the proceeds depends on future performance.
• Maybe you're expected to remain involved for a period of time.

This matters because the timing of your money can be just as important as the amount. If you're planning to retire immediately after selling your business, you need to know more than what the business is “worth.”

You need to understand: How much will I actually receive, and when will I receive it?

What If the Business Is Worth Less Than Expected?

Now let's make the scenario a little uncomfortable. Suppose you've been planning around a $3 million sale. Then the offers come in around $2.2 million. What happens?

You have options.

• You could sell anyway.
• You could delay retirement and continue working.
• You could reduce your planned retirement spending.
• You could look for other sources of income or capital.

None of those choices is automatically right or wrong. The problem is discovering that you need to make one of those choices after you've already committed to the sale. That's why it's so important to stress-test your retirement plan before you exit.

Ask questions such as:

• What happens if the sale comes in 10% below expectations?
• What if it's 20% below expectations?
• What if it takes two additional years to sell?
• What if I have to finance part of the transaction?
• What if I need to stay involved in the business longer than expected?

Don't think of them as pessimistic questions. Think of them as planning questions.

The goal is to understand how much flexibility you have if it doesn't go exactly as planned.

Don't Let One Transaction Carry Your Entire Retirement

For many business owners, the business is their largest asset. That's understandable. They've spent decades building it. But it also creates a unique form of concentration risk.

Your business may represent a significant portion of your net worth, but unlike a diversified investment portfolio, you can't easily sell a small piece of it every month to pay your living expenses.

You generally have one major transaction. And that transaction happens at a very important moment: right before or at the beginning of retirement.

• If the business struggles, its value can decline.
• If the buyer disappears, the sale can be delayed.
• If market conditions change, valuations can shift.
• And if you have been counting on the transaction to fund nearly all of your retirement, you may suddenly have a problem on both sides: The business is worth less, and your retirement plan needs more from your other assets.

That's one reason diversification becomes especially important as you approach an exit. You want to gradually build a retirement plan that doesn't require one transaction to go perfectly.

Build the Retirement Plan Backward

Instead of starting with the question, “What is my business worth?” try starting somewhere else.

Start with the retirement you actually want. What will your retirement lifestyle cost? How much income will you need? What assets do you already have outside the business? What other sources of income will you have?

Then ask: How much does the business sale actually need to provide?

That's a much more useful question than simply saying, “My business is worth $3 million, so I'm good.”

Maybe you discover that you only need $2 million from the sale. That's valuable information. Now you know what you're really planning for.

And if you discover that you need nearly every dollar of an optimistic business valuation to make retirement work, that's valuable information too... Because you still have time to do something about it.

You might need to:

• Build more savings outside the business
• Improve profitability
• Reduce owner dependency
• Strengthen the management team
• Improve the business's transferability
• Start the exit process earlier
• Adjust your retirement timeline
• Reconsider what your retirement lifestyle will look like

The important thing is that you discover the gap before you're standing at the closing table.

Ask “What If?” Before You Have To

One of the most valuable conversations a business owner can have before an exit is a simple one: “What if?”

• What if the business sells for less?
• What if it takes longer?
• What if the buyer backs out?
• What if the deal structure changes?
• What if taxes are higher than expected?
• What if you need to keep working for another two years?
• What if you don't get the number you've had in your head for the last five years?

Those questions don't mean that you're expecting the worst, just anticipating reality. Because the strongest retirement plans aren't necessarily the ones built around the most optimistic assumptions. They're the ones that can absorb a few surprises without completely falling apart.

Your Business Can Be Part of the Plan Without Being the Whole Plan

Your business may be one of the most valuable assets you'll ever own, but an estimated sale price isn't the same thing as retirement income. Before you build your future around the value of your business, make sure you understand three things:

• What is the business realistically worth?
• What will you actually receive after taxes, debt, fees and deal structure?
• When will you actually receive the money?

Then stress-test your retirement plan. What happens if the sale falls short? What happens if it takes longer? What happens if you have to change course?

The goal isn't to assume your business will sell for less. The goal is to make sure your retirement doesn't depend on your business selling for exactly the number you hope it will.

This content was generated utilizing the help of AI research and is intended for informational purposes only. Please consult a qualified professional for personalized advice. For specific tax planning advice or services, please consult a qualified tax advisor or CPA.