Retirement is not a word that often rolls off an entrepreneur's lips. Whether starting a new business or enjoying the benefits of an established one, few entrepreneurs care to think about their golden years-or anything else that might separate them from their companies.
Perhaps it's their built-in tolerance for risk, or the success-at-any-cost passion that entrepreneurs wear on their sleeves, but many seem to want to work until they hit it really big--or die trying. But that strategy won't ensure a life of leisure when 38 turns into 83. And it won't provide for your family--or your funeral--at any age. Like it or not, to retire rich requires careful planning at every stage of your business. From starting up to selling out, there are things every entrepreneur should be doing to balance the inherent risks of owning a business with the inevitable certainties of old age and death.
First, Do No Harm
Carmine Caccavale liquidated every penny of his savings to launch Mount Vernon, New York-based GNC Payroll Plus in 2002. He sold his house. He emptied his retirement savings. He even paid penalties to cash out his 401(k). "That's probably not the textbook way to start a business, but that's my approach: I burned the boats," he laughs, comparing his new venture, which projects $700,000 in 2005 revenue, to the old Viking battle tradition of victory or death.
But unlike many entrepreneurs, Caccavale, 38, also made sure his family's financial future was secure. A $2 million life insurance policy and a disability income policy at least guarantee that, in case of misfortune, his fledgling business venture won't bankrupt his spouse or prevent his two daughters from going to college.
The decision to take out life insurance, he says, was based partly on a tragedy that struck Caccavale's family 30 years ago. Shortly after starting a new check-cashing business, Caccavale's father was killed in his store in 1976, leaving his family nearly destitute.
Caccavale's use of insurance is a smart move, says Mark Menges, an independent financial planner in Columbus, Ohio. Menges coaches entrepreneurial clients on the best ways to build personal wealth. Reducing startup risks through insurance is one of the first things Menges recommends for early stage entrepreneurs. But he also says having a Plan B makes good financial sense. "Don't put every penny you have into the business," he says. "If you have a downturn or even growing pains in the business, you need the ability to access money from other sources."
Tom Taulli, an attorney, author and business finance advisor in Newport Coast, California, says it's hard to overstate the importance of reducing business risks of all kinds during the startup phase. He suggests purchasing life insurance policies on each founder and key employee. "For just about every emerging growth company, there are key employees. If one or more [dies], it can wreak havoc on a company," he says. "One way to deal with this is to purchase key-person insurance." In case of tragedy, the insurance plays a dual role: It pays not only to replace the person, but also to buy the company stock back from his or her surviving heirs.
Whether through death or simply disagreement, the departure of a partner, key employee or spouse can derail a startup and threaten the founder with loss of control. Devising a plan to deal with such issues is best done in the original documents that create the company, including the shareholder agreement. Within the contract that each shareholder signs should be a buy-sell agreement that maps out how a founder can buy back shares of stock from partners, employees and other shareholders. If you're an early stage entrepreneur like Caccavale, your business is your most valuable and important personal asset-so maintaining control is key to retiring rich.
Retirement is still a long way off for Caccavale, but it's already on his mind. "This money that I'm investing now-I know I'll get it back in spades," he predicts. "That's going to be my retirement."