Don’t wait to close: build a business that finances your retirement

Most entrepreneurs dream of building a business, scaling it, and one day turning it into a lucrative exit. With that payout, they hope to ride off into the sunset. However, relying solely on future sales is a risky strategy, leaving business owners with little financing when they leave. Ideally, your company should do the same finance your pension years before you consider selling.

Changing your mindset and your money is the key to building a business that thrives and actively secures your financial future.

The Exit Myth: Why a Windfall Isn’t a Plan

Too many entrepreneurs treat their eventual business sale like a lottery ticket. However, a successful exit is not guaranteed. Market conditions can change at any time and buyer interest can dry up. An unforeseen health issue or family responsibilities can also accelerate timelines.

It has been found that a large percentage of small business owners never manage to sell their business. According to Morgan & Westfieldsmall businesses have a success rate between 15% and 30%. The success rate for medium-sized companies is estimated at 30% to 70%.

Even among those that do sell, many sell at prices that are below expectations. As such, an exit strategy based on the assumption that it will or will not happen is more of a gamble than a good investment.

For this reason, forward-thinking entrepreneurs build their retirement savings into their business from day one, not as an afterthought, but as a fundamental part of their strategy.

Related: Why every entrepreneur needs an exit strategy – and how to create one

Principle #1: Treat your business as a source of income, not a piggy bank

In the early stages of your business, it’s tempting to reinvest every dollar in it. However, that strategy often leads to a dangerous imbalance: your business is growing, but your finances are stagnant.

Start thinking of your business as an income-producing asset that can finance your operations and your financial goals. In other words, you should pay yourself a reasonable salarymaking pension contributions and accumulating wealth outside the workplace.

You have a financial cushion with consistent income and investments, even if the company doesn’t sell.

Principle #2: Separate personal wealth from business wealth

There is often a blurring of the boundary between personal and business finance among entrepreneurs. Even though that seems efficient, it creates a risk. If your business suffers or goes bankrupt, so do your retirement prospects.

Instead, start investing some of your profits or salary. Included here are:

• Solo 401(k)s or SEP IRAs. Small business owners and self-employed individuals can save for retirement tax deferral through these accounts.
• Brokerage accounts. Unlike retirement accounts, these are useful for building long-term wealth.
• Real estate or passive income streams. Your assets should not be limited to your core activities. You can consider investing in rental properties or dividend-paying stocks that pay dividends regularly. Additionally, selling digital products or online courses can provide a stable source of passive income.

You build a firewall between the two by diversifying your business and pension.

Related: Why is it necessary for entrepreneurs to keep personal finances and business accounts separate?

Principle #3: Use Profits First – With a Twist

According to Mike Michalowicz, “Profit First” encourages business owners to allocate profits before costs, reversing the traditional equation between revenue, expenses and profit.

In retirement planning you can apply the following logic: “Retirement first.”

As soon as you pay yourself, you automatically deposit a fixed percentage into a pension or investment account. This essentially turns it on autopilot instead of leaving it to willpower.

If your business hits a few bumps, this small habit will create a snowball effect and help your retirement grow.

Principle #4: Build a marketable business, but don’t rely on sales

If you plan to sell one day, consider this a bonus and not your end game. Until then: focus on creating a business who could survive without you. Essentially this means:

• Creating systems and processes that are documented.
• Minimize your direct involvement.
• Setting up recurring revenue streams.
• Establishing a strong financial record and performance metrics.
• Building a reliable, competent team.

By taking these steps, you increase the value of the company, which is beneficial whether you sell it or pass it on. However, you have built a sustainable income engine, even if you keep it.

Principle #5: Don’t forget tax strategy

To plan for a successful retirement, you need to think tax strategies. To reduce taxable income and stimulate retirement savings, entrepreneurs can use the following instruments;

• Defined benefit plans. Unlike traditional IRAs, these plans allow high earners to contribute huge amounts.
• Health Savings Accounts (HSAs). If it is used for medical expenses, it is a triple tax benefit.
• Deduction of business expenses. Taking advantage of deductions for travel, home office and equipment can reduce your taxable income, meaning you can contribute more to your retirement.

Talk to a tax advisor who is familiar with business finances. After all, when you save taxes, you can invest that money in your future.

Related: 4 Ways to Eliminate (or Significantly Reduce) Your Tax Bill.

Principle #6: Think long term, not just growth

It’s easy to aim for revenue goals or vanity metrics like seven-figure months, viral growth, and investor buzz. However, these achievements will not hold true in the longer term long-term personal wealth.

The success of your business should be measured not just by its growth, but by its ability to support your life goals, especially retirement. Ask yourself regularly:

• How much money do I consistently save outside of my business?
• Even if I never sell, can I retire within ten years?
• How sustainable is my current lifestyle?

Rather than relying solely on market trends or social media stories, let these answers guide you.

Principle #7: Consider annuities or passive investment vehicles

You may want to consider investing some of your personal wealth in low-volatility, income-producing assets once you’ve built it up. Examples include;

• In addition to providing predictable returns, fixed indexed annuities protect the main character.
• Income can be generated by dividend-paying stocks or REITs.
• A CD ladder or bond ladder can provide reliable cash flow without high risk.

While these options don’t offer the excitement that comes with scaling a business, they can give you peace of mind.

Final Thoughts: Build to live, not just to leave

There are other paths to financial freedom than the ‘big exit’. For example, one of the most stable and realistic paths is to set up a company that offers real-time pension financing.

You don’t have to wait for the perfect buyer, market cycle or exit for your future. Instead, from now on, let your business provide the steady energy that will enable your long-term freedom.

Most entrepreneurs dream of building a business, scaling it, and one day turning it into a lucrative exit. With that payout, they hope to ride off into the sunset. However, relying solely on future sales is a risky strategy, leaving business owners with little financing when they leave. Ideally, your company should do the same finance your pension years before you consider selling.

Changing your mindset and your money is the key to building a business that thrives and actively secures your financial future.