An interesting conversation occurred during a real estate closing earlier this year. My clients in their early 50s were talking with the seller who was retiring, and asked him, “what is the right age to retire?” The seller paused, and then responded by telling us that looking back on it, he wished he had retired 5 years ago. He is 65 and an unforeseen event, like COVID, had caused all he looked forward to doing in retirement to be put on pause, likely for 18 months or so. He was concerned about what his health would look like when he was 67 and if all those bucket-list trips would still be possible.
The seller’s words struck a chord with everyone in that room and should strike a chord with every business owner in their 50s reading this article. In talking with many business owners, the craziness that was 2020 has more of them coming to the belief that working until 65 isn’t the desired norm anymore. As such, starting exit planning early is key for a small business owner, as many times a substantial amount of their retirement nest egg will come from the sale of their business.
For the small business owner, maximization of value for their business is critical, but it does not happen overnight. While it is true someone can just wake up one day and decide to sell their business in short order and retire. Likely that person will be leaving money on the table at closing. To properly set up your business to maximize its value can take time, sometimes a couple years, but if you take the proper steps and work with the right team, you will hopefully put yourself in a position to have the retirement you dreamed of and check everything off that bucket list.
So, what items should a small business owner be looking at, generally? A first step, and sometimes the most important step, is to get your house in order. This can include making sure all of your company documents, including ownership records, contracts with key customers/vendors, agreements with employees, and financial records are all proper and in place. Unfortunately, we have seen deals be delayed, purchase prices reduced or even deals fall part due to these items.
Are your company records up to date, showing a clear history of ownership? Do you have contracts in place with the appropriate parties? Every buyer and their team of advisors are going to do due diligence in review of your business. A buyer will want to be sure that whomever is selling the business has the authority to do so. Also, as a part of due diligence, a buyer will look at contracts with key customers, vendors and employees. These can affect projections made by the buyer as to purchase price and buyer’s bank as to lending exposure.
Have you taken actions to help your company minimize income for taxes purposes (i.e. end of the year expenditures)? While not showing a profit is okay (and sometimes ideal) when it is your business, it can cause issues when looking to sell your business. For example, those actions may hurt how much a banker will feel comfortable lending, and thereby decrease the purchase price and/or make it so you have to seller finance part of the purchase. If maximizing the amount of money coming in on the day of closing is the most important thing to you, adjusting your thinking as to income (and taxes related thereto) well prior to selling the business may be needed.
These are just a few items that should be reviewed as a part of your business planning. To prepare a complete plan and set yourself up for a successful retirement, a small business owner should meet with a team of advisors to help prepare a strategy. This team should, at a minimum, include your attorney, accountant, financial planner and a business broker. The attorney will help you get your documents and contracts in order. The accountant can help you get your finances in order. Your financial advisor can help determine your retirement finance needs, and therefore what sale price you would likely need. Lastly, a business broker can offer invaluable insight as to how the market looks for your business now, what they see in the future, and overall things you should do to position your business to maximize a sale price.
It takes time to properly sell a business. You might not be looking to cash out and retire today, but you don’t want to leave money on the table when you do. So, start planning early so you can strike when the time is right.
Contact Mike Demerath at 920-430-1900 for questions regarding the sale of your business.