Stuart Robertson is the CEO and President of ShareBuilder 401k, a technology-forward 401(k) provider for small- to mid-sized companies.
For the small-business owner, the company is often more than a source of income; it is a labor of love, a legacy and the central repository of their time, effort and capital. This deep commitment sometimes leads to a dangerous financial assumption: that the business itself will serve as the primary retirement nest egg, having a high value through a profitable sale when the time comes to step away.
While the prospect of a high-value exit is enticing, sound financial planning demands a more cautious and diversified approach. The stark reality is that many businesses cannot be sold. This underscores the need for entrepreneurs to build robust, parallel retirement savings, such as through tax-advantaged vehicles like a 401(k) and/or an IRA.
Challenging Assumptions
The assumption that selling the business is a guaranteed retirement fund represents a significant gamble, effectively putting all “eggs in one basket.” This single-asset concentration is often unique to entrepreneurs and contradicts conventional investment wisdom.
The risk is quantified by sobering statistics, with a 2019 infographic from SCORE revealing that approximately 34% of small-business owners have no retirement savings plan outside of their company. More recently, in 2024, research sponsored by my company found 25% of small-business owners are not contributing to retirement. Critically, the Exit Planning Institute notes that as few as 20% to 30% of small businesses listed for sale successfully transition to a new owner.
I’ve found the failure to sell is rarely due to a single market flaw, but stems from multiple interconnected challenges. Many small businesses are built on the owner’s unique human capital, making them inherently difficult to transfer ownership to others. Buyers are often wary of companies where the operational and client relationships are closely tied to the founder.
Furthermore, factors like an owner’s overconfidence in the business valuation, poor record-keeping, a lack of documented processes or even unfavorable market conditions can quickly derail a sale, often forcing the owner into the painful realization that the business must be closed or wound down, yielding little or no profit for retirement. For the entrepreneur who has foregone traditional savings, this is not merely a disappointment; it is a personal financial crisis.
Diversifying Through Retirement Accounts
This is where proactive diversification through dedicated retirement accounts becomes a powerful strategy. By utilizing small-business retirement plans, entrepreneurs can simultaneously grow their business and personal wealth, securing a vital contingency plan. It’s important for business leaders to discuss their options with their financial advisors.
In recent years, 401(k) plans have become very affordable for any size business due in part to government tax credits for businesses with 1 to 100 employees that can help cover costs, such as employer matching contributions.
Even for those who are self-employed, there is a plan called the solo 401(k). The solo 401(k) is particularly suitable for owner-only companies, as it allows the individual to contribute in two capacities: as an employee and as the employer. This dual contribution mechanism enables higher annual limits.
Moreover, the option to invest through a Roth account, whether a dedicated Roth IRA or the Roth contribution option within a 401(k), offers tax flexibility. Contributions to a Roth are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. If the sale of the business is successful, the resulting capital gains could cause the owner to be taxed at a higher rate in retirement. Having a Roth account provides a source of income that is protected from future tax increases, helping to strategically balance the tax liabilities created by a successful business sale.
The Challenges
There is some work required to start up a retirement plan. Setting up the plan, managing ongoing compliance (including IRS testing) and ensuring a smooth digital experience are all important steps. When looking for the right provider, consider whether they offer a good digital experience with access to a service team that can answer your questions.
If the business has more than 15 employees, payroll integration may be worth it. Do the providers you are evaluating offer integration with the payroll service you use? While it is not difficult to do manual payroll uploads or input entries each pay cycle, the more employees you have, the more beneficial payroll integration might be.
There is also the need for a company to be the fiduciary as per the Employee Retirement Income Security Act (ERISA). This means the company will have a legal duty to act in the best interest of employees. This includes ensuring costs are reasonable and that the fund line-up is reviewed and maintained at a high level. Some businesses use a provider that offers an advisor to do this (ERISA 3(38) advisor). This relieves some core fiduciary risks of overseeing the investments.
Failure to manage the plan well can create personal liability for owners.
Building A Safety Net
Building a retirement portfolio is about acquiring options and financial freedom. It provides the entrepreneur with a safety net, helping them prepare to retire comfortably even if they choose to close the business rather than sell it, or if external market forces make a sale difficult.
This diversification also gives the owner negotiating leverage. If a financially independent owner receives an unfavorable offer, they can walk away, rather than being forced to accept a bad deal out of necessity. The ability to make a choice, rather than being subjected to circumstance, is a strong measure of financial success.
Contributing to a retirement account is a commitment a business owner makes not only to their legacy, but to their future self. Not to mention, a 401(k) helps all their employees build a more stable financial future. A retirement plan transforms the owner’s options from a high-stakes, all-or-nothing bet on the business into a more secure and diversified certainty.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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