Navigating the Emotional and Practical Challenges of Exit Planning for Retirement

By Cassandra Smalley, CFA, CFP^®

For many small business owners, the business itself is not just a source of income but their identity and retirement plan. The thought of exiting—whether through selling, passing it on to a successor, or winding it down—can be overwhelming, fraught with emotional and practical challenges. As financial advisors, we can guide business owners through the complex process of exiting on their terms.

The Business as a Retirement Plan

It's not uncommon for small business owners to view their business as their sole retirement plan. The idea is simple: build a successful business, sell it for a substantial sum, and use the proceeds to fund retirement. However, the reality is much more complicated. Research shows that only about 20–30% of small businesses listed for sale are successfully sold.¹ This stark reality highlights the importance of encouraging business owners to transition business wealth into personal wealth much earlier in the business lifecycle and diversify retirement savings beyond the business itself to enhance financial security.

The Emotional Struggle of Letting Go

Letting go of a business is not just a financial decision; it's deeply personal. Many business owners find it hard to imagine a future where they are not in control of their business. The fear of seeing the organization change direction without their leadership, concerns of how to fill their time, the loss of personal relationships, a sense of responsibility to their employees, or the fear of not having "good years" left to enjoy retirement can be paralyzing. Owners may face anxiety over losing daily challenges and the sense of purpose that comes with running a business. For some, the business has been their focus for decades, and the thought of stepping away can feel like losing a part of their identity. These emotional hurdles must be addressed alongside the practical aspects of exit planning.

Take Celeste for instance, a medical practitioner still very much in the expansion mode. As age 70 approached, Celeste recognized she had not done enough to meet her goals of the business’s full potential. After multiple conversations at her dining table with her partner and me, tears welled up in her eyes when she asked, “Can we make it happen? I don’t have as much time and energy left and I want to enjoy my life.” Her voice trembled as she confronted her fears of the work it would take to get the business in a position to sell at the price she wanted. 

Preparing Business Owners Well in Advance for Exit and Retirement

A successful business exit doesn’t start when a business owner decides to sell—it should begin much earlier, ideally from the launch of the business. For many business owners, 80–90% of their wealth is tied up in the business itself.² This concentration of wealth presents significant risks, especially if a sale doesn’t go as planned or the business faces an unforeseen downturn. 

Advisors play a pivotal role throughout the entire lifecycle of a business, from its inception to its growth and expansion phases. Engaging in proactive planning, advisors can help owners prepare for an eventual exit and retirement. These discussions should emphasize the importance of transitioning business wealth into personal wealth throughout the owner’s career rather than waiting until the exit is imminent. By starting this process early, owners reduce their reliance on the final sale of the business for retirement, enhancing their overall financial security. From advising on how to reinvest profits during growth phases to planning tax-efficient strategies for wealth building, financial advisors can coach business owners to adopt a mindset that prioritizes both business success and personal wealth creation as well as the lifestyle the owner envisions beyond their career. When it comes time to exit, the owner is in a stronger financial position, with diversified assets that provide more options and peace of mind to enjoy their retirement.

The Practical Steps of Exit Planning

Given the complexity of exiting a business, financial advisors can guide their clients through the following steps to help them maximize the net after-tax value extracted from the business:

Step 1. Assemble the Right Team: To ensure the process is handled with the utmost care, minimizing risks, and maximizing the client’s goal, their team should be comprised of you as the fiduciary financial advisor, a CPA, a business broker, and an estate planning attorney. 

Step 2. Get Your Books in Order: A potential buyer will scrutinize the financial health of the business and will likely review the last five years of profit and loss statements, tax returns, owner compensation details, and cash flow. Properly organized financials can significantly enhance the appeal of the business to buyers.

Step 3. Identify Red Flags: Before listing the business, the owner will want to identify and address any red flags that can derail the sale process. These might include unresolved agreements, unfavorable contracts, challenging lease terms, outstanding debts, liabilities, litigation issues, or employee challenges. 

Step 4. Consider Your Buyer Options: Deciding whether to sell to an internal or external buyer will likely present different payout options for the owner. Internal buyers might include key employees or family members, while external buyers could be competitors or private equity firms. Each option has its pros and cons, and starting the search early can help the owner finalize the transaction on their preferred timeline.

Step 5. Involve Key Employees: Ask the owner to identify key employees who have been instrumental in the success of their business to consider how they may be involved in the exit process. They might be potential buyers or candidates for leadership roles under new ownership. Their involvement can also ensure continuity and ease the transition for the business, its employees, and its customers.

Addressing the Emotional Steps of Exit Planning 

As financial advisors, we don't just focus on the numbers; we help business owners navigate the emotional landscape of retirement. For those struggling with the idea of letting go, encourage exploring new passions that can provide a sense of purpose in retirement. Discuss the importance of gradual transitions—rather than an abrupt exit—to ease the client into this new phase of life. The fear of losing one's identity or the anxiety about the impact of such a significant change on personal life, including marriage, family, and health, is real. Ensure they have a clear vision for their post-exit life, helping them to see retirement not as an end but as a new chapter full of potential.

When Elijah, a 45-year-old with multiple offers and an option to coast into an early retirement, turned down one offer after another, it was clear this was not a decision based on money. He enjoyed his craft, spending time with his staff, and the option to continue to grow his firm and build another business along the way. His drive was more valuable than any buyer could negotiate at this stage, even after a full financial plan was presented with little financial concern in sight. His identity was so wrapped up in the business, Elijah wasn’t ready to let it go just yet. 

Step 1. Acknowledge the Emotional Impact

The first step is acknowledging that exiting a business is more than a financial decision; it's a life-altering event. This can be a difficult realization for business owners, who might not want to admit they’re anxious about the change. A key conversation starter could be, “How do you envision your daily life after stepping away from the business?” This question can open the door to a discussion about the owner's concerns, hopes, and fears about their future.

Step 2. Set New Goals for Post-Exit Life

Business owners may struggle with finding something to look forward to after exiting, or feel unsure about what their next purpose might be. As their advisor, you can help them explore new possibilities by asking, “What passions or hobbies have you set aside because of the business?” or “What have you always wanted to pursue but never had the time?” Then ask how their goals and hobbies may change from one decade to the next. These questions can help owners see retirement not as the end of their journey but as a new beginning full of opportunities. 

Step 3. Plan for Gradual Transition

Suddenly going from 60 hours a week to zero can be jarring. A phased approach to retirement, by reducing involvement over time or taking on a consulting role, can ease the emotional transition. You might suggest this with a question like, “What would an ideal gradual transition look like? How could you step back from day-to-day operations while staying involved in key decisions for a period?” This can help owners feel more comfortable with the idea of letting go.

Step 4. Address Identity and Legacy

A major fear for many owners is losing their identity, as the business has been central to who they are. Advisors can help reframe this by focusing on the legacy they leave behind. Ask, “How would you like your business to be remembered? What impact do you hope to leave?” This shifts the focus from what they are losing to the lasting contributions they’ve made.

Step 5. Discuss Family, Health, and Personal Relationships

Exiting a business can also bring up concerns about how the change will impact personal relationships, family dynamics, or even health. Advisors can encourage open dialog by asking, “How do you think this transition might affect your personal life or relationships?” 

Helping Business Owners Face the Transition

The key to guiding a business owner through the emotional transition of exiting their business is to listen, ask open-ended questions, and provide reassurance that retirement is not an end but a new chapter. By taking a holistic approach—addressing both the financial and emotional aspects of the transition—advisors can help business owners embrace retirement with confidence, ensuring they are ready to move on to the next fulfilling phase of their lives.

Conclusion

Exit planning is a complex process that intertwines financial, emotional, and practical considerations. For many business owners, their business is more than just a livelihood; it's their past, present, and future and a significant part of their identity. As their advisor, you can guide your business owner clients to navigate the challenges of exiting with confidence, ensuring they achieve both their financial and personal goals. Our role as advisors is not just to manage the technical aspects of the exit but to help business owners envision and prepare for a fulfilling life after business, ensuring they are truly ready to step into their next adventure.

¹ Exit Planning Institute. “The State of Owner Readiness™ Research.” Accessed September 2024. 
² Kowalski, Colleen. Exit Planning Institute. “Understanding Exit Planning.” January 9, 2023. 

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Cassandra Smalley, CFA, CFP^®, is the founder of Cassandra Smalley Wealth Management and author of The Why of Wealth: Mastering the Steps to a Wealthy Mindset to Live a Joyful Life.

image credit: Adobe Stock Images