There are 12 million baby boomer business owners, and they’re about to retire. Their businesses are worth trillions of dollars, but they may not know how to actually turn the business into a financial assets that they can use during retirement. Many don’t have a transition plan. The problem is liquidity. A business if often less liquid than a house and the value of a business may be closely tied to the presence of the owner.
One expert in helping small business owners is quoted as saying: “Small business owners often have less in investment assets than their employees, figuring that their business may be worth millions of dollars. For most small business owners, 80 or 90 percent of their personal wealth is tied up in a privately-held, illiquid business and most of them don’t know how to take that asset and turn it into cash they can use to support themselves in retirement. And they don’t even know what they don’t know about it.”
An owner’s cash often goes into supporting the business and his lifestyle. When times are good and businesses are in demand, the owner is reluctant to sell. During bad times, as many small businesses are facing today, the sales value of a business may be a fraction of what it once was.
A lot of the problem is brought about by psychology. Most small business owners have confidence in their ability to manage their business but lack confidence in making investments. This creates problems because if the retirement assets are tied up in the business, when it’s time to “cash out” the boomer business owner finds himself forced to keep running the business because he can’t get a fair price and doesn’t have enough saved to really retire.
How to solve this dilemma? That’s a subject for another day.