Returning from a less-than-positive physical exam, Sebastian realizes he needs to start thinking about retiring in the next few years.

But how?

Although he has a daughter in the business, she's still inexperienced. His CFO would do a great job running the business, but he has insufficient resources to buy Sebastian out. And with the tight credit markets, competitors may not be able to afford a buyout; plus, Sebastian doesn't want them to know he's even considering retirement.

So here he is, with a business worth at least $25 million, and yet he's concerned he won't be able to exit his business for at least five years. He doesn't want to liquidate his business, but he certainly would like to liquefy some of his business equity.

This scenario plays out over and over in American business, and it will be an even bigger issue as baby boomer business owners flood the marketplace. Different from their affluent counterparts who have their wealth diversified and managed, the owner of a closely held business often has wealth concentrated in a nondiversified, low tax-basis asset. There is significant wealth on the company books, but the equity may be trapped in a C Corporation, unavailable to access without double taxation.

Further, because of tight credit markets the owner may not be able to leverage the business's equity through traditional loans. Compounding the challenge is that family members are often involved in the business, and there is no such thing as purely a "business decision" when it comes to how to exit the firm. Simply stated, retirement and wealth transfer planning for the private business owner involves far more moving parts than for the wealthy individual who is sitting on a diversified, managed portfolio.

But all is not lost; the business owner can convert business wealth into diversified retirement wealth. It's just a matter of timing and planning. A good start is for the owner and advisors to recognize some fundamental principles that affect business exit planning. These principles are paramount in helping the owner realize that what helped build the business is not necessarily the same as what will help the owner leave the business.

Principle 1. To convert business equity into retirement income, the owner needs to begin managing the business more like an asset than just as an enterprise.

Most business owners have spent a lifetime working in their business, but little time working on their business. Their success in the marketplace was derived from hard work, strategic thinking and strong execution. But if the business value is now intended to be personal capital for the owner, then that value must be managed as an investment asset.

Noted business appraisal expert Z. Christopher Mercer has suggested the owner consider allocating 1% of the business's value to the active management of the business as an asset. The idea is that a managed brokerage account typically has as asset management charge in the 100-to-150 basis-point range. If a business owner earmarks a comparable percentage of the business equity to asset management, the process has begun for converting business equity into retirement income. These earmarked funds might be used: