When you talk to your investment professional, you realize that investments take many different shapes and forms. In fact, it’s wise to diversify between different products. Your portfolio might be comprised of any variation of a 401k, stocks, and bonds.
Business owners factor in their business as part of their retirement investment.
If you’re like many business owners, you might be heavily invested into your business. As you near retirement, or perhaps reaching that point of being done with the business, you will want a large payout from your business. You’ve been investing time, energy, and money into it for years waiting to cash out.
Despite viewing the business as an investment, when it comes time to leave the business, owners develop a single-minded view of how that investment should look—a lump sum of cash. Everyone anticipates selling their business then moving on to a cushy, cash-funded retirement.
Ironically, most retiring business owners will take their lump sum of cash and invest it into other products, such as mutual funds or stocks. They effectively sell the stock of their own company, one that they control and understand, to invest into a company they have no control over, such as Apple or Home Depot.
There’s a different option.
Turning Your Business Into An Annuity
What if rather than pursuing a one-time lump sum, you were instead guaranteed a monthly check?
When we convert a business to an annuity, we transition the business owner out of the business and bring in an interim CEO. Oftentimes this also involves creating a board of directors, which the CEO reports to. Once fully stepped out of the day to day, the business owner receives a monthly salary. The owner can continue with the next phase of their life while still maintaining ownership.
The interesting thing we’ve noticed when we do this is that oftentimes this transition makes the business more profitable.
For example, a client recently determined that the sale of her business would not meet her retirement needs. Rather than selling her business, we converted it into an annuity guaranteeing her a monthly income over $25,000. With the interim CEO in place and an incentive structure for the new leadership, the business is thriving. Now the owner has the option to continue to perpetually receive her monthly income or in several years sell the business for closer to what she needs to achieve retirement. Should she stay with the monthly salary, her heirs inherit a thriving business.
With another client, we placed one of our Exit Consulting Group team members as the interim CEO to oversee the initial phase of the transition. Once the business goes through the first phase of the transition, we will hire a CEO to take the helm.
At the end of the first year, this business revenue increased by over $1 million. Keep in mind that this was in addition to paying the owner’s monthly salary. Now the business owner has the option to keep all the profits or reinvest a portion into the business.
Why Explore the Annuity Option
To put it bluntly, many businesses will not sell for what the business owner either wants or needs for retirement.
It’s similar to the homeowners who overbuilt the neighborhood. While the house won’t sell for enough to cover their investments, they can successfully rent it for a monthly profit. Despite not living in the house anymore, the new landlords still own the house and control all of the major decisions. Just like the house owners, a business owner removes themselves from their business and instead collects a monthly check.
We use the annuity option for business owners who need creative solutions to meet financial needs, want to retain ownership of the company, or want to set up a legacy for a business. It can also be a strategic solution to navigating a family business’s generational transition.
Benefits of Annuity Option
In addition to achieving financial needs, the annuity option allows the owners of a company to control the legacy of the business. While managing the company and protecting its best interests, at the end of the day the CEO reports to either the owner or an established board of directors.
For owners who want to maintain their vision for a company, they can establish a board of directors who understand that mission and continue to execute it. This way the legacy is preserved after the owners pass away. Owners can sit on the board if they choose to do so.
As with all exit options, there isn’t a cookie cutter, one-size fits all answer. Converting a business into an annuity comes with a range of options. For example, rather than maintaining 100% ownership of the company stock, you could sell off a portion. Many times, private equity groups will buy a percentage of the stock, which brings an influx of cash to grow the business. Other times, a key employee or family member will purchase a percentage of the business.
At Exit Consulting Group, we develop creative solutions to help transitioning business owners achieve their long-term goals. We explore every option, developing the best-case scenario for both you and your business. Check out our range of services to see all the ways we help business owners and their businesses move onto the next phase.