Entrepreneurs and Retirement Savings: The Big Gap
You already know about the valuation gap facing many VARs and MSPs. Now, take a look at the retirement savings gap facing many entrepreneurs who own those businesses.
According to a BMO Wealth Management survey: Seventy-five percent of small business owners have saved less than $100,000 in retirement funds. The situation is particularly precarious for older entrepreneurs. A dramatic 68 percent of entrepreneurs ages 45 to 64 have less than $100,000 in their retirement recounts. And only 8 percent have saved more than $500,000.
Salaries among small business owners also were cause for concern:
- More than 90 percent of SMB owners paid themselves less than $100,000 a year, with 1 percent drawing $500,000.
- Fully 81% of the respondents said they save $25,000 or less for their retirement on an annual basis.
Succession planning also is a major challenge, with fully 33 percent of owners planning to hand the company (at no cost) to a relative or close the business upon retirement.
Addressing Retirement, Ownership, Exit Issues
To address the ownership and retirement issues above, BMO recommends four steps:
- Create a Business Plan: A business plan is a great tool to help you envision how your business will function and grow. It is also a necessary document that lenders need to review prior to lending money, the company says.
- Corporately Owned Life Insurance: Life insurance can be used to protect your business in the event of loss of control on the death of one of the owners. If that is the case, the life insurance can buy out the interest of a surviving spouse or family member.
- Sourcing Capital: Business lines of credit, business credit cards, government loans and venture capital are all ways of sourcing capital. A financial professional can work with you to find the most suitable type of credit that fits with your business.
- Tax Planning: A tax professional can help you to enhance your personal wealth through your business by discussing the use of corporate structures and individual pension plans.
MSP, VAR Retirement Challenges
The situation is similar within the IT channel, where many business owners are discovering that their businesses are worth far worse than anticipated, according to HTG Peer Groups.
During the organization’s IT Channel conference in September, HTG CEO Arlin Sorensen described how many small MSPs ($5 million or less annual revenues) would have to work overtime in the years ahead to close key valuation gaps.
Generally speaking, MSPs are worth roughly 5X to 7X their annual EBITDA (earnings before interest, taxes, depreciation and amortization, according to Service Leadership Inc. However, buy-side advisors like Cogent Growth Partners say valuations are based on the eye of the beholder — bidders, that is.