Defined Benefit Plans and Exit Planning
A Hidden Tool for Business Succession
For doctors, lawyers, dentists, and other small business owners, the concept of retirement is often tightly intertwined with business succession. You’re not just winding down a career—you’re transitioning ownership of a business, transferring responsibilities to a partner, or selling a practice you’ve spent decades building.
And in that moment of transition, the most common challenge isn’t whether you’ll retire—it’s how you’ll retire.
Will you have enough liquidity to leave comfortably? Will the sale of your business cover your financial needs? Can you extract value without triggering unnecessary taxes or disrupting your team?
This is where a defined benefit (DB) plan offers a powerful—but often overlooked—solution.
Far more than just a retirement savings vehicle, a DB plan can serve as a strategic exit planning tool, helping business owners:
Accelerate wealth extraction before a sale
Convert taxable business income into future personal retirement income
Provide clarity and stability to incoming partners or successors
Create a tax-advantaged cushion of liquidity outside the sale itself
In this chapter, we’ll explore how DB plans align with succession planning and practice transitions. You’ll learn how these plans can be intentionally designed around your timeline, how they fit into a business sale, and how to unwind or transition them properly.
The Succession Planning Problem
Let’s start with a common scenario: You’re a successful business owner approaching retirement. Your income is strong, your practice is stable, and you’ve decided that in 3–5 years, you’ll either:
Retire and close the business
Sell your practice to a third party
Transition ownership to an associate or partner
In each case, one thing becomes clear: you need to extract as much value from the business as possible before the transition—without incurring a massive tax burden or putting pressure on the buyer.
Yet many owners wait too long to prepare, relying solely on the proceeds of a future sale to fund retirement. That’s risky. Deals fall through. Valuations drop. Tax liabilities spike.
A defined benefit plan changes the math.
The Exit Planning Power of Defined Benefit Plans
When used strategically, a defined benefit plan helps you do three things exceptionally well:
1. Accelerate Retirement Wealth Before Transition
The final 5–10 years before exit are typically a business owner’s highest-earning years. DB plans allow you to shelter and redirect significant portions of that income—often $150,000 to $300,000+ annually—into a tax-deferred retirement vehicle.
Instead of waiting for a lump-sum payout from a buyer, you build a personal pension fund under your control, outside the sale.
2. Reduce Business Taxes Pre-Sale
Contributions to a defined benefit plan are tax-deductible to the business. By maximizing contributions in your final working years, you reduce your tax bill while simultaneously increasing your net worth.
This also makes the business’s net profit appear lower—potentially helping with valuation negotiations in certain deal structures, especially where compensation adjustments are considered.
3. Create Clean Separation and Certainty
Buyers and successors prefer clean transitions. A defined benefit plan offers clarity:
Benefits are predetermined
Contributions end upon exit
The seller (you) can receive your full benefit independent of the deal
Employees see continuity, which supports retention
It’s a financial structure that signals professionalism—and stability.
Case Study: Dr. Martinez’s 5-Year Exit Strategy
Dr. Ana Martinez, a 60-year-old ophthalmologist, owned her practice for 25 years. With no children in the business and no partners, she planned to sell to a larger medical group at age 65. Her CPA referred her to us with a question: “Can we build retirement income now, before the sale?”
Here’s what we did:
Designed a defined benefit plan with $230,000/year contributions
Added a Safe Harbor 401(k) for an additional $30,000 in deferrals
Structured the plan for a 5-year funding timeline
Created minimal benefits (5% of pay) for 4 employees
Invested conservatively to match her 5-year horizon
Results:
Total pre-sale tax-deferred contributions: $1.3 million
Estimated tax savings: ~$520,000
Retirement income stream secured before business sale
Buyer inherited a clean, terminated plan (no ongoing obligations)
By setting up the plan 5 years before her exit, Dr. Martinez was able to pull value out of the business in a tax-efficient way, with no impact on the buyer.
Sale Structures and Plan Coordination
Defined benefit plans can be adapted to fit various types of succession strategies, including:
✅ Third-Party Sale
The seller uses the plan to extract income before the sale. Upon closing, the plan is terminated, and benefits are rolled into an IRA.
Buyers love this because:
It eliminates the need to fund legacy benefits
It keeps retirement obligations off the balance sheet
Employees can be transitioned to a new 401(k) without disruption
✅ Buyout by Junior Partner or Associate
If you’re selling to someone already inside the business (e.g., a younger associate), a DB plan can help phase out ownership by:
Creating a clear endpoint for your retirement benefits
Structuring the business to afford buyout payments over time
Allowing your successor to start their own plan post-transition
✅ Practice Wind-Down
If you plan to retire and simply close the doors, a DB plan gives you the perfect tool to extract value in your final years of income—and then roll it over tax-deferred.
This is particularly useful for solo practitioners with no intention of selling or handing off the business.
Structuring the Plan Around Your Timeline
One of the unique advantages of a defined benefit plan is that it can be tailored to match your personal exit horizon.
Let’s say you’re 57 and plan to retire at 65. That gives us 8 years. We can:
Set a target benefit based on your retirement income needs
Design a funding schedule that ramps up contributions over time
Invest the plan to align with a known liquidity event (your exit)
Each year, we recalculate the contribution range based on performance and business income. As you get closer to retirement, we may shift into lower-risk investments and begin preparing for distribution or rollover.
Plan Termination: The Final Step
When it’s time to exit the business, your plan needs to be terminated the right way.
Our firm handles every aspect of this process, including:
Final actuarial valuation
Participant benefit calculations
PBGC termination filings (if applicable)
IRS and DOL documentation
Lump sum rollovers or annuity purchases
Final Form 5500 and Schedule SB filings
Most importantly: You walk away with your full retirement benefit intact—rolled into an IRA or annuitized for life income—fully separated from the business.
This gives you liquidity without relying solely on the sale of the business.
Benefits to the Buyer or Successor
When transitioning your business, your defined benefit plan isn’t just a personal tool—it’s a strategic selling point. It tells the buyer:
The business has a history of retirement planning
There’s a structure in place that supported employee retention
There’s no messy “unfunded promises” hanging over the transition
The seller has already planned their financial exit—no ongoing obligations required
For internal successors (e.g., younger partners), this sets the stage for starting their own plan, cleanly and independently.
What Happens If You Sell Mid-Plan?
If you’ve started a defined benefit plan but haven’t completed your funding goal when a sale or succession event happens, you still have options:
Freeze the plan: Stop accruals but keep assets invested
Amend the retirement age: Adjust payout schedule
Terminate and distribute: Roll over your share, distribute benefits to others
Continue under new ownership: If buyer agrees, plan can be maintained with modified terms
We’ll help you evaluate the best option based on deal structure, business continuity, and your retirement timeline.
Timeline Example: 7-Year Exit Plan
Year Action Goal 1 Set up DB + 401(k), contribute max Begin wealth extraction 2–5 Continue contributions Accumulate $1M+ tax-deferred 6 Begin reducing hours Plan phase-out, adjust funding levels 7 Sell practice, terminate plan Rollover funds, begin retirement income
Summary: DB Plans as a Succession Strategy
Too often, business succession focuses only on legal structures or buyer negotiations. But the most successful exits start years earlier—with a personal financial strategy that ensures the seller is secure, the business is stable, and the transition is clean.
A defined benefit plan allows you to:
✅ Extract wealth on your terms
✅ Defer and reduce taxes
✅ Build guaranteed retirement income
✅ Give buyers and employees clarity
✅ Control your exit without relying entirely on the sale price
When paired with a 401(k) or profit-sharing plan, this structure becomes even more powerful—offering nearly $300,000+ in annual contributions for those over 50.
If you’re within 10 years of retirement or succession, now is the time to begin. We can show you what a customized DB plan looks like based on your income, business, and goals.