When selling your business, have a retirement backup plan
The proceeds that come from selling a business can be an important part of your retirement plan. But if you’re counting on the sale to fund most or all of your future expenses, tread carefully. Executing a sale takes preparation, good timing and, often, the help of knowledgeable advisors.
What’s your exit strategy?
Selling a business on short notice reduces your options and threatens your ability to achieve your retirement goals. That’s because buyers operate on their schedule, not yours. Just because you’re eager to sell doesn’t mean buyers are ready to buy. Nor does it guarantee they’ll meet the price you need to fund your intended retirement lifestyle.
It’s especially important to plan ahead if you expect to use the business sale as the main source of retirement funds. Your ability to achieve your goals can be hampered if you’re overly optimistic about the sale price.
By developing an exit plan years in advance of an actual sale, there’s a better chance you’ll achieve your retirement goals. Having a plan gives you time to either boost the eventual sale price of your business (see the sidebar “Building your company’s value”), develop alternative strategies for funding your retirement goals, or downscale your future plans.
Setting too high a price is a common mistake for business sellers. Just as you need a realistic view of your home’s price before putting it on the market, you need to determine what your company will be worth to a buyer.
An appraisal from a valuation expert who specializes in small- and middle-market businesses can give you an objective view of what your company might fetch in a sale. However, it’s important not to get too attached to an appraisal number. The merger and acquisition market is constantly in flux, and many factors affect the kinds of offers buyers will make.
Strong management adds value
It can be difficult to let go, especially when you’ve built your business from the ground up. One irony of selling a business, however, is that the more it depends on its owner, the lower its sale price. That’s because potential buyers project your company’s performance after you’re no longer around to guide it. Their financial risk is higher if your company has no history of success without your involvement. Consequently, buyers may reduce their asking price, or insist that you stick around longer during the transition — both of which could interfere with your retirement plans.
In contrast, by building a company to last — one with a strong management team that can sustain the loss of an important member — you create more value that may ultimately result in a higher sale price. In the years leading up to your sale, then, look for ways to make your business bigger than just you. By developing and nurturing your management team, you can turn your company into a more valuable asset.
What’s your backup plan?
It’s perfectly reasonable to expect to fund your retirement with the proceeds of your business sale. But what will you do if the results fail to meet your expectations?
No matter how thorough your preparations, you may not get the price you need, when you need it. Market conditions change, and a buyer that’s interested today may not be interested tomorrow. Accordingly, it’s smart to have a Plan B — an alternate path to your retirement goals in case you don’t receive enough money to fund Plan A.
Your backup strategy should involve regular saving and investing well before your planned retirement date. Your advisor can be instrumental in helping you prepare for the sale of your business while simultaneously giving yourself the maximum opportunity to reach your goals independently of how your first option proceeds.
Building your company’s value
If you haven’t found a buyer willing to pay what you believe is a fair price for your business, consider taking steps to increase its value. To make your company a more attractive acquisition target, consider paying down debt, spinning off non-core divisions, or boosting earnings before interest, taxes, depreciation, or amortization (EBITDA).
Too much dependence on a key person, particularly an owner, can hurt a company’s chances of an advantageous sale. So empowering your management team to take on more responsibility will demonstrate that your business is built to thrive in its next chapter — with or without you. Finally, find a knowledgeable merger and acquisition advisor who can recommend value-enhancing strategies and help you position your company in the market to its best advantage.