Editor's Note: This article is part of the Financial Advisor series "How I Solved It." Advisors describe a client with a problem and what they did to help.

Individuals and couples depending on the sale of a small business to fund their retirement may find themselves up a creek without a paddle: Retirement may be more expensive than they bargained for; it may be tougher to sell their businesses than they anticipated; or their businesses may fetch far less than the valuation figures dancing in their heads.

Steven Kaye, a managing director with Minneapolis-based Wealth Enhancement Group and head of its Warren, N.J. branch, recently engaged a business owner who overestimated the value of the gas stations he had owned for decades. The client thought the proceeds of the business, which were his primary source of income, would fund the bulk of his retirement. But when he sold his business several months ago, prior to meeting Kaye, he received about 50% less than the valuation calculated five years earlier.

Two pieces of legislation decimated the valuation the client had been expecting, said Kaye. When his state raised its gas taxes, motorists stopped flocking over the nearby state line to purchase cheaper gas from his stations. And the minimum wage increase also ate away at his business’s profitability. The client, in his 60s, hadn’t considered the impact of these legislative changes, said Kaye.

When it comes to pending legislation, “don’t be like the deer in the headlights or the frog in the boiling water,” said Kaye. “You must be aware of your surroundings and react to what’s going on.”

However, “small business owners often rely upon what they see in the rear-view mirror,” said Kaye, instead of planning strategically and getting current valuations. One factor behind this rear-view mirror planning, he noted, is that owners of gas stations, dry cleaners, delis and small retailers often hear through the grapevine and get caught up in how much money other business owners received from selling similar operations nearby.

His client also failed to evaluate other deal structures that might’ve helped minimize his tax bite from the sale of his business. The client took the full proceeds in a lump sum instead of considering whether an installment sale would’ve been beneficial, said Kaye. By spreading out payments and assigning different assets to different parts of a transaction, sellers can defer taxes and possibly lower their overall tax liability. Business owners should consult with an accountant and an experienced transactional attorney, he added.

Rethinking Retirement
Kaye’s client, who had planned to retire when he sold his business, is now looking for other work. Kaye is encouraging him to list every job he’d consider doing and is making conservative financial projections for the client based on these potential income opportunities.

“He knows he’ll have to work at least two days a week forever,” said Kaye.

According to Kaye, approximately 50% of the client’s financial assets are from the sale of his business, 25% are from an IRA and 25% are from non-qualified investment accounts.

Kaye and his team have been talking to the client about his risk tolerance and are doing Monte Carlo simulations. They’ve also begun reallocating the client’s financial assets to better meet his retirement needs.

To take some risk off the table, Kaye said they’ve moved a portion of the client’s equity into Wealth Enhancement Group’s risk mitigation strategy, which uses four different funds and targets 50% market correlation up and down. The team has started to build a structured note ladder for the client that will have 10% to 20% downside buffers and 20% caps on the upside. “We’ve given up upside to get downside protection,” he said.

They’ve also put a piece of the client’s portfolio into a conservative income-oriented private real estate fund that Kaye said should help provide 4 ½% dividend income plus some appreciation.

Kaye generally isn’t a big fan of annuities, but he’s starting to analyze whether an annuity might make sense to help fulfill this client’s need for steady and predictable retirement income.

Business owners, like everyone else, need to think proactively about retirement. “It’s the same old adage,” said Kaye. “We don’t plan to fail—we fail to plan.”