When most small business owners get their companies started, thelast thing on their mind is retirement planning. They’re too busybuilding funds and claiming market share to put together asuccession plan or even hire employees, let alone think about howthey might fund a retirement plan for their employees.

But once the business has gained some ground — during what JoeSkarda, retirement plans specialist and training director atSapient Financial Group calls the “mature stage” of thebusiness — the owner needs to plan for what will happen to hisbusiness after he retires, and if he has employees, he will likelywant a plan that provides for his employees while also funding hisown retirement.

The right plan

Small businesses have unique needs and challenges that largercompanies don’t face, so they are uniquely placed to take advantageof some of the retirement plans available.

Michael A. Masiello, a financial advisor with Masiello & Associates, said hiscompany has seen a lot of interest in SIMPLE IRAs among smallbusiness owners.

SIMPLE IRAs are designed for employers with fewer than 100employees. This option allows the owner and any plan participant tosave up to $10,000 annually; if an employee is older than 50, anadditional $2,500 contribution is allowed.

“It’s a pretty simple plan, and very attractive,” Masiello said.“It’s only about $15 per employee, so you’re not breaking the bankto put together a plan for them.”

Masiello added that, with the SIMPLE IRAs, employers canparticipate with employees and make a choice of how much they’dlike to contribute; 2 percent of each employees’ compensationacross the board or a match of up to 3 percent.

Skarda agrees that the SIMPLE IRAs are a popular and valuablechoice for small business owners.

“There are no administrative costs above and beyond the expensesof the fund, no tax return to file, no compliance testing to bedone,” he said. “That all reduces the cost of maintaing the fund,so every dollar that is put into the plan goes directly to theemployees and the employer themselves.”

401(k)s can also be a good option for the right business,Skarda said, because of the flexibility the plan allows. However,there are some drawbacks.

“It comes with a great deal of accountability on the partof the employer, and if the employer is very small sometimes whenyou figure in the accounting costs and the administrative costs onthe 401(k), it makes the costs too high for the employee,” he said,adding that many 401(k) sellers had reduced their fees over theyears.

For small business owners with no employees who are trying toplay catch up, a solo defined benefit plan might be the rightoption, according to Masiello.

“We’ve seen some defined benefit plans allow well over $100,000in contributions, depending on the circumstances,” he said.

But the plans are sophisticated and only right in certaincircumstances, Masiello said.

Walter Joly, a registered investment advisor at Compass CapitalCorporation, says defined contribution plans are a popular choice for smallbusinesses. Profit-sharing plans are one type of definedcontribution plan which are increasing in favor. The plans aretypically employer funded, and have a 25 percent contributionlimit.

However, with a profit-sharing plan, contributions do not haveto vest immediately, so if an employee leaves the company before acertain period of time, the employee won’t receive thecontributions made to the plan on their behalf.

Joly said this plan is beneficial because there’s moreflexibility in the plan design and choosing how the profit can beshared. In other words, it’s easier to design a plan that’s morebeneficial to the business owner than to the rank-and-fileemployees.

Succession planning: the biggest challenge

The biggest issue to consider when helping a small businessowner prepare for retirement, though, is the succession plan.

“For small business owners, the largest single asset that theyown would be their business,” Joly said. “They may or may not beoperating as a single proprietorship, and unless they have somesort of succession plan, the most important thing they have toconsider is how to sell their business when they prepare forretirement.”

Jeff Stern, a principal with Eagle Business Solutions,believes every small business owner should sit down with a CPA orsomeone who specializes in valuation to get a real idea of whattheir business is worth. For some companies, the value might onlylie in the physical property, but if the business has a reputationand substantial customer base, there may be value there, aswell.

Once the valuation is completed in writing, the next step insuccession planning is to draft a buy-sell agreement, answeringquestions such as who will take the business over if the ownerdies, becomes disabled, or retires?

“More often than not many businesses don’t transfer to the nextgeneration,” Masiello said. “So business succession iscritical because it’s one of the ways that a business owner getstheir life’s value out of their business: by selling it to a thirdparty or a business partner.

“A small business owner typically might have a competitor or aperson in a similar industry who’s a good fit work out an agreementto buy the business, as well.”

Masiello admitted that succession planning can be a harddiscussion; but it’s a necessary one.

“As humans, most people don’t want to look at their mortality ortheir morbidity,” he said. “But it’s not an if I die business, it’sa when I die business. Our preference is to make sure your businessand your family is ready. Most people pour their heart and soulinto their business but they don’t protect it, so we want to helpthem do that, because they’ve done a great job on the surfaceproviding for their family because of the business.”