For Mark Roberts’ Use:
Owning your own business is a dream come true for many, and it can be one way to get ahead in the world. However, there are also risks involved with business ownership, and many businesses fail each year. It makes sense for small business owners to plan carefully for retirement, because the business may not be worth what they’d hoped years down the road. This could force the owner to continue working beyond the point he or she had planned, or to sell the business for less than the amount needed to retire comfortably.
Rather than assuming the business will be the primary source of income during retirement, business owners should be careful to diversify. Diversifying assets will help to protect against risk, and provide for more financially stable retirement years. When a business is viewed as an investment, this plan makes sense. It is customary to diversify investments to protect against loss; this way, if one investment performs poorly, the individual doesn’t lose everything. It’s important to remember that a small business is essentially an investment. It may not be a pleasant thought, but small businesses can and do fail.
There are several events, which are out of the business owners control, that could negatively impact the business. Economic conditions can be unpredictable, and if the U.S. falls into a recession in the future, the business’s profits could drop and prevent retirement. This could also prevent a profitable sale of the business, as investors are usually wary of such transactions during a recession.
Other variables which are often outside the business owners control include consumer trends, rising energy prices, and new technology. All of these factors can weaken the business and even allow for a larger competitor to dominate the market.
Since all of these factors are unpredictable, the old adage to “never put all of your eggs in one basket” certainly applies to business ownership and retirement. By building an investment portfolio outside of the business, owners can help to ensure a comfortable retirement without depending too heavily on the value of their business.