For most North Jersey business owners the business is the retirement plan. That is the problem. A retirement funded by a single illiquid asset, whose value depends on the owner continuing to show up, is not a plan. It is a bet.
On this page
- Start with an uncomfortable question
- Retirement plans available to a small business
- How the exit is structured changes what you keep
- If the plan is to hand it to family
- New Jersey specifics worth knowing
- The single most useful thing you can do
- Funding the buy-sell, and the rule that quietly breaks it
The exit
Start with an uncomfortable question
What is the business worth to someone who is not you?
Owners tend to value a business on revenue, on effort, or on what a competitor supposedly sold for. Buyers value it on transferable cash flow and on how much risk walks out the door with the owner. Those two numbers can be far apart, and the gap is better found early.
The factors that most reduce what a buyer will pay:
- Owner dependence. If the relationships, the technical knowledge, or the sales all run through you, a buyer is purchasing a job rather than a business.
- Customer concentration. One client at 40% of revenue is a discount, not a strength.
- Financials that will not survive diligence. Personal expenses run through the business are normal and are also the reason a buyer’s accountant reduces the price.
- No management layer. A business that cannot run for a month without you cannot be handed over.
Each of these takes years to fix, which is why this conversation belongs five years before a sale, not five months.
Retirement plans available to a small business
Check the plan you have against the ones available; a plan chosen years ago may not fit now.
- SEP IRA. Simple to run, employer contributions only, and the same percentage must go to every eligible employee. Easy, and expensive once you have staff.
- SIMPLE IRA. Employee deferrals plus a required employer contribution. Lower limits than a 401(k), lower administrative burden.
- Solo 401(k). For an owner with no employees other than a spouse. Allows both employee deferrals and employer contributions, which is why it usually permits far more savings than a SEP at the same income.
- Safe harbor 401(k). For a business with staff. Avoids annual nondiscrimination testing in exchange for a required employer contribution.
- Cash balance plan. A defined benefit plan paired with a 401(k). For an owner with strong, stable profit who is behind on retirement saving and wants very large deductible contributions, this is the highest-capacity option available. It also carries funding obligations that do not go away in a bad year, which is precisely why it is not for everyone.
The right structure depends on your age relative to your employees, your profit stability, and how much you actually want to contribute for staff. There is no default answer, and the plan you set up at 35 is rarely the right one at 58.
Rather go through this with your own numbers? We can cover it in a short conversation, at no charge and with no obligation. Book your Business Owner Review
How the exit is structured changes what you keep
Price gets the attention. Structure determines the after-tax result.
- Asset sale against stock sale. Buyers generally prefer an asset sale for the step-up in basis and the liability protection. Sellers generally prefer a stock sale for the capital gains treatment. Where you land is a negotiated point with a real dollar value, not a formality.
- Allocation of purchase price. In an asset sale, how the price is allocated across asset classes drives the tax character of your proceeds. This is negotiated and it matters.
- Seller financing and earnouts. Common, and they mean you are still exposed to the business after you have left it, without control over how it is run.
- Consulting and non-compete payments. Taxed as ordinary income, not capital gain. A buyer who shifts price into these is shifting tax burden onto you.
- Installment treatment. Can spread the gain across years and reduce the top-year rate, at the cost of carrying the buyer’s credit risk.
Bring the tax question into the negotiation, not after it. The structure is settled at the letter of intent stage, and by closing it is generally too late to change.
Plans, family and funding
If the plan is to hand it to family
An internal transfer is not simpler than a sale, only different. The recurring failure points are consistent:
- The child who is taking over and the children who are not, and whether “equal” and “fair” are the same thing in your family.
- Funding. A family buyer usually cannot pay cash, which means seller financing and years of dependence on the business continuing to perform.
- Valuation for gift and estate tax purposes, which requires defensible support rather than a family agreement.
- Whether the successor actually wants it. This one is worth asking directly and early, and hearing the real answer.
New Jersey specifics worth knowing
Sale proceeds are not pension income, so New Jersey’s Pension and Retirement Income Exclusion does not apply to them. Worse, the sale year’s income almost certainly pushes total income above $150,000, which switches the exclusion off entirely for that year. Any pension or IRA income you draw in the same year is then fully taxable by New Jersey. Selling in one tax year and drawing retirement income in another is often worth real money.
A large sale year can also produce a spike in income that affects Medicare premiums two years later through IRMAA. See our Medicare page. The timing of a sale therefore has consequences that arrive long after the closing.
New Jersey has no estate tax, so the size of the business does not by itself create a death tax problem. What can create one is who inherits it. New Jersey’s inheritance tax follows the relationship, not the estate size, and a business left to a sibling, a niece, a nephew, or a long-time non-family partner is taxed at 11% to 16%. An illiquid business can therefore generate a tax bill with no cash to pay it, purely because of who is named. See our New Jersey inheritance tax page.
The single most useful thing you can do
Build retirement assets outside the business, deliberately and consistently, starting now.
Every dollar held outside the business is a dollar that does not depend on finding a buyer, agreeing a price, or the business still being healthy on the day you want to stop. It is also the thing that lets you decline a bad offer.
Funding the buy-sell, and the rule that quietly breaks it
An agreement saying the surviving owners will buy the deceased owner’s share is worth whatever money stands behind it. Insurance is the usual funding. Without it the agreement obliges the survivors to find a large sum at the worst possible moment, and it is the family of the deceased owner who bears the failure. Key person coverage is the separate case, where the business rather than the family is the beneficiary and the proceeds cover the revenue and disruption that follow losing someone the business depends on. Those premiums are not deductible, which is a frequent surprise.
The trap. Section 101(a)(2) of the Internal Revenue Code is the transfer-for-value rule. If a policy is transferred for valuable consideration, the income tax exclusion on the death benefit is cut back to the consideration paid plus premiums paid afterward, which means the tax-free death benefit stops being tax free. This is easy to trigger by accident when a buy-sell is restructured and owners swap policies on each other. The statute names exceptions, including a transfer to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer, and those exceptions are the reason the structure of the agreement has to be settled before any policy changes hands. Restructuring a funded buy-sell without checking this is one of the more expensive unforced errors available to a private company. See the life insurance page.
This page is general educational information and does not account for your circumstances, and it is not tax or legal advice. Retirement plan rules, contribution limits, and tax treatment change and depend on facts specific to your business. Work with your accountant and attorney before acting.
This page is general. Your situation is not.
How the exit is structured changes what you keep, and the plan you put in place now decides what is available to you when the sale happens. We can cover it in a short conversation, at no charge and with no obligation.
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Booking is handled through Rosefinch Investment Advisors. North Jersey Retirement is not affiliated with, endorsed by, or sponsored by any government agency, retirement system, plan sponsor, or employer named on this site.