Retiring tips: Tapping into the value you built

If you are one of the 28 million small business owners in America, chances are your business may be your single largest asset. This may be tricky when it's time to retire. When business owners decide they are ready to travel, hit the links or just do something else in their golden years, they often look to cash out of the business either by selling it or by passing it on to family members.

According to the Financial Planning Association/CNBC Business Owner Succession Planning Survey released in 2015, 78 percent of respondents said they plan to sell their businesses to fund their retirement, and that the proceeds are needed to fund 60 percent to 100 percent of their retirement needs. Yet less than 30 percent of survey respondents said they actually have a written succession plan.

It's important to have a succession plan in place well before retirement. The goal of a succession plan is to allow an organization to continue to conduct business in the event of a key individual's departure, whether planned (such as through retirement) or unplanned.

Building a succession plan

Building a succession plan should be done with the help of an attorney, accountant and financial advisor, as these professionals can help you to anticipate issues that you might never think of on your own.

The main things to think about are who will run the business when you exit, and how the ownership interest will be transferred to future owners.

If the business is a sole proprietorship, consider who will succeed you as leader, and allow enough time to transfer knowledge and train your successor to run the business successfully.

If the business is family-owned or if you have employees who have played an important role in the growth of the business, the decision about who will be your successor can become more complicated. Plan carefully around the personalities involved, choosing family members or employees who will make strong managers. Don't be afraid to make hard decisions about family members or employees who simply may not be suited to run the business.

Putting the plan Into action

Once management succession is decided, business owners should plan on how the business will be sold when retirement time comes.

First, owners must place a value on the business. Since business values can change dramatically from year to year based on any number of variables: gross revenues, changes in the tax code, profit margins, the economy, etc., consider a formula based on an earnings multiple or profit margin to determine the valuation of the business.

Second, decide how to structure the succession. According to the FPA/CNBC Business Owner Succession Planning Survey, most buy-sell transactions are financed by installment sales (42 percent) and earn-out arrangements (34 percent). Employee stock ownership plans are an option preferred by 14 percent of business owners. Your advisors can help you structure a buy-sell agreement that works best for you.

Finally, ensure that employees and family members have the funds necessary to purchase the business when you're ready to sell, even if the sale comes at an unexpected time, such as if the owner unexpectedly dies or becomes disabled.

For most business owners, your business is your life. It may be difficult to step away entirely or it may be exciting to begin a new chapter in your life during retirement. However you envision your golden years, a business success plan can help you achieve your goals.

• Kim Jenson is managing director and Chicago Metro Market Head at UBS Financial Services Inc. She be reached at kim.r.jenson@ubs.com or on LinkedIn at www.linkedin.com/pub/kim-r-jenson/9/255/490/en.

As a firm providing wealth management services to clients, UBS offers both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus. Any information presented is general in nature and not intended to provide individually tailored investment advice. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. Neither UBS Financial Services Inc. nor any of its employees provide tax or legal advice. You should consult with your personal tax or legal advisor regarding your personal circumstances. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC.