PETE THE PLANNER: Be cautious about planning to sell your business to fund retirement

Dear Pete,

I own a small business on the north side of Indianapolis and haven’t booked a dime of new revenue since all this chaos started in early March. I have been unable to secure Paycheck Protection Program funds and didn’t even qualify for government stimulus. By my calculation, the only way to save my business after my personal emergency fund is gone is to cash in my retirement money. I’ve made a really solid living, and I used to have a successful business, but I’m not sure how quickly things switch back on for me. I’m 46 years old and I don’t share finances with anyone. Is it foolish to use my retirement money to support my business? I think the shock of the whole thing has worn off, but I still don’t know what to do.

—Jill, Indianapolis

If I were in your shoes, Jill, I would have the exact gut-wrenching feeling you’re having. The good news is, you’re surviving, you have an emergency fund, and you’re trying to make a pragmatic-yet-measured financial decision. If you’re going to sacrifice your current retirement plan to save your business, you’d better make sure your business is your retirement plan.

About 10 years ago, I was working with a small-business owner to develop a financial plan for his family. At the first few meetings, he consistently used the phrase, “My business is my retirement plan,” which isn’t that unusual of a phrase to hear a business owner deliver.

The problem was that he was five years out from wanting to retire, the business owned few assets, and he had absolutely no strategy to identify buyers of his business. On top of that, a vast majority of the nonexistent operations manual for his business was buried deep inside his brain.

There is absolutely nothing wrong with business owners viewing their business as their retirement plan. That is, if they treat their business with the respect a retirement plan deserves. Many small-business owners treat their business like a lifestyle business, as opposed to a valuable asset that can be later sold.

I obviously don’t know where you were on this journey before the economic shutdown, but if you decide to liquidate your retirement investments to save your business, then your business must officially become your retirement asset.

Before we go much further, it’s OK if the idea of selling your business isn’t appealing to you. Maybe your business is too personal to sell, and it’s quite possible you designed it to be a lifestyle business, while your retirement investment portfolio did the heavy lifting of retirement planning.

If rebuilding your business to sell it is a priority for you, make sure your business decisions and processes reflect this. Systematize everything. Your business should be able to run without you because your operations manual details all your processes. One of my favorite business books that explains this process is “The E Myth Revisited” by Michael Gerber.

You’re experiencing the same conundrum many business owners who were left out of the stimulus plan are experiencing: If I don’t sacrifice my future for the now, I won’t have a future or a now.

If you do decide to liquidate your retirement to save your business, you need to keep a couple of factors in mind. First, make sure you account for the tax obligations you’ll have. The last thing you need is a tax bill coming due to stunt your  momentum.

Next, lean-out your household finances as much as humanly possible. While the situation you described is certainly an emergency, ensure it’s as easy as it can be by reducing your personal consumption to emergency levels. Not only will this lessen the burden of your business’s cash flow, but it will reset your lifestyle as you hurtle toward a redefined retirement.

Finally, don’t solely depend on selling your business to fund your retirement plan. Make regular contributions to a retirement plan as you rebuild. You have 20 years or so left, and you can accumulate quite a bit of money in that time.

One last note: If you haven’t already, contact the Indy Chamber and inquire about its Rapid Response Loan Fund. It’s perfect for people who haven’t been effectively served by the Paycheck Protection Program. Best of luck to you. I’m pulling for you.•

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Dunn is CEO of Hey Money, a subscription-based financial-problem-solving company, and Your Money Line, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.