When it comes to retirement, many small business owners plan to sell their businesses. You’ve worked hard in your business for years, you should be able to cash out of it by selling it, right? Yes and no.
In my March post, called “Where’s the Exit?” I talked about the importance having an exit strategy. In that post, I said, “The business person has three options when it comes to exiting the business:
- Shut it down and walk away.
- Hand it down to a family member.
- Sell it.”
My post from a couple of weeks ago, “Retirement: Passing a Business to a Family Member” talked about option #2 above.
Today I’m going to dive into selling your business as part of your retirement plan. The first two sections below might contain numbers that shock you or might make you feel a bit like giving up on this idea. Read on. I’m going to try to address those things in the rest of the post.
Your Retirement Needs
The first step is you need to know how much money you need to have in order to retire to the lifestyle you want. A quick and dirty way of working this out is to assume that you’ll want to maintain your current standard of living and that it’s going to cost roughly the same amount of money to maintain it as it does right now. According to Wikipedia, the average life expectancy in the US is 79. Some financial planners recommend that people plan on 85 in their retirement planning. After all, you don’t want to run out of money when you’re 80. Okay, if you retire at 65 and plan to live to 85 and your current lifestyle costs you $110,000 per year to maintain, you need $110,000 X 20 = $2,200,000. Now if you subtract your current age (let’s use 50 years old) from your retirement age and multiply that number by 12 to get the number of months you have until you retire: 65-50 = 15, 15×12 = 180.
Now if you divide $2,200,000 by 180 you get $12,222. That’s roughly how much you’d need to save between now and retiring (assuming you have no retirement savings right now).
These calculations are not going to be precisely accurate and they aren’t intended to be. They’re intended to get you into the neighborhood and that’s all. If you want a more precise calculation that takes into account inflation, taxes and a host of other factors it would be wise to sit down with a financial planner.
Current Sale Value
The next step is to get an idea what your business is worth right now. A down and dirty way to find out, is to look it up on www.bizbuysell.com. You can search for your business category and your county and come up with a list. I just did a search like this for florists in Los Angeles County. The search results listed floral shops for sale for anywhere between $20,000 at the low end and $325,000 at the high end. So if you’re a florist, saving for your retirement is pretty important since right now the best price you can hope to get is $325,000. That said, there are over 200 businesses listed on that site with asking prices over $1,000,000 in Los Angeles County. Yours might be one of those. That isn’t altogether likely since about 85% of the 1500+ businesses that were part of the search results were listed below $1,000,000.
Again, this is not meant to be an accurate way to value your business, but it gets you into the neighborhood. If you want to be more accurate find a business broker who will do a complementary valuation.
When it comes to business valuation, you need to be realistic and take the emotion out of it.
Position Your Business to Sell
If you compare the numbers in the above two sections and do the math, things might seem pretty bleak. Selling your business might not seem like much of a retirement strategy at all. However, the title of this post is “Retirement: Selling Your Business for Top Dollar” so now I’m going to give you some tips about how to get top dollar for your business based on market conditions at the time of the sale. This does not mean that I’m going to tell you how to ensure that your business sale will be able to fund all of your retirement needs. There’s no crystal ball here or anywhere else that can predict your business’ sale price 5, 10 or 15 years from now. The five tips below will help you get the best possible price at the time you are ready to sell.
Target the Right Buyers
There are basically two types of business buyers. (a) Those who want to roll up their sleeves and work in the business. They want to be owner-operators. (b) Those who want to invest in an operation that they don’t have to work in on a day to day basis. They want to be absentee owners.
If you’re looking to get the highest possible price for your business, you want to target type “b.” That means your business needs to be well enough established that the buyer won’t have to be there every day to keep it running. It also needs to be scalable.
Adriana Smith of First Choice Business Brokers in Los Angeles, bizbrokersla.com, describes scalability this way, “When we say ‘scalable infrastructure’ we mean can you grow revenue like 20% next year and handle it? Are there people? Are there processes in place? Do you have the right assets in place? Do you have enough space? All of it – from your human resources to your capital equipment and all of that in place. A buyer wants to see something they can grow and they’re not going to spend the next two years ‘fixing house’ to then grow. They want to come in and grow right away. The other key point is that the business owner isn’t the only one responsible for bringing in the customers.”
Get Your Books in Order
It’s absolutely vital that your business’ books are in good shape. You should have a computerized accounting system and a competent bookkeeper. You should also learn how to read basic financial reports like a Balance Sheet and Income Statement. Buyers are going to look at your financials first and if those aren’t to their liking, they’ll stop right there. Make sure your finances are in order.
Develop Marketing and Sales Systems
As Ms. Smith said, it’s important that the business owner isn’t the only one responsible for bringing in the customers. You need a marketing and sales team that is able to bring increasing amounts of customers in to fuel the growth of the business without you, the business owner, having to be directly involved. How this is done will vary from business to business. If you want to get top dollar for the sale of your business this step is vital.
Systematize Your Entire Business
Once you’ve gotten your marketing and sales systems in place you need to systematize the rest of the business so it can scale. Your business needs to be able to grow as demand increases. Consistently good quality products and services are achieved by having systems in place to care for them. These systems would be built on what you have found to work best in your business. Of course, your staff need to be trained on these systems so they follow them and do their jobs as well as you would if you were still doing them.
You’ll also need a competent management team to run the operations in your place. It will be their job to keep the business growing and running profitably by adhering to the proven systems you’ve put in place.
Grow Your Business
The sale price of your business is going to be based on how much money it’s making. That’s the first thing buyers are going to be concerned about. Therefore it is to your benefit to grow it as large as possible right up to the time of the sale. It’s also important that the business shows consistent growth. A short growth spurt followed by a leveling off or decline is not going to be very attractive to buyers. If you’ve taken the above steps your team should be able to grow the business and maintain consistent growth year after year.
Be Prepared for the Sale Process
Business owners need to be aware of the costs involved in selling their businesses.
Lana Hout from First Choice Business Brokers, bizbrokersla.com, says, “If you’re having the transaction done by a qualified broker you’re going to pay them a commission. You’re going to pay escrow fees. In California there’s a bulk sale law they have to be aware of and there are certain things that need to be done, so more escrow fees. Sellers also have to pay Capital Gains tax. They need to be aware of that.
“Sellers also need to understand that part of what ends up happening sometimes is that through the escrow process things like tax liens, or any other liens on the business, they will have to be paid in order to close the transaction.”
Business Broker Ramon Grijalva of Venture Investors Business Group, www.ventureibg.com, has the following advice for owners who are selling their businesses,
“I’d give three guidelines for business sellers.
- Represent business financial and operational conditions accurately and clearly. That makes Due Diligence run smoothly. And NEVER state a falsehood. Transactions go smoothly when the parties can trust each other.
- Respond to Buyer queries promptly. Time can be your friend if you are quick, but delays can kill a deal.
- Price your business to sell. You get the most attention when your business hits the market. If you overprice you run the risk of losing that initial interest.”
Plan Your Exit and Take Action Now
There’s no way to predict how much you can sell your business for in 5-15 years. So you need to include saving for your retirement in your plan. On the positive side, as you implement the above and position your business for sale at top dollar, you’ll also make more money so you’ll be in a better position to save for your retirement. Whatever you do, don’t put it off. The sooner you make a plan and implement it the more likely you’ll be able to retire to the lifestyle you want.
Contact us if you need any help with your exit strategy.