As baby boomers and those older were growing up, it was common to think of selling a business and retiring at age 55, then enjoying the golden years. This was based on a life expectancy of 65 to 70 years. The current trend of life expectancy as 75 to past 85 changes the dynamics, particularly with talk of life expectancy to be over 100 in coming years.
To complicate the matter, the recent financial meltdown significantly reduced the savings and investments of many coming up on retirement age. Many have recovered most of their losses by now, but the pain is still fresh in their minds, along with the feeling of being vulnerable.
Most business owners will not be able to replace their business income from other investments or from investing the proceeds from selling their businesses, so the thought process goes that they need to hold onto their businesses to maintain the cash flow generated by a business and try to build additional wealth aside or apart from the business.
Generally speaking, most business owners think they will live for another 20 years after they retire. The issue is they have not done the analysis and math to figure out whether they have amassed enough wealth to live off that wealth for 20 years or more.
Among the issues that are typically not considered is whether they truly have the energy level and willingness to make the continued commitment to maintain and grow the business. It is challenging to look in the mirror and ask yourself this question without emotion. Other issues are the continued requirement to reinvest, which often means having to borrow more money to keep pace with the marketplace and technology. Many times, the reinvestment cannot be recovered in the sale, much like remodeling your kitchen just before selling your home; most of the time, you will not recover the investment and the loan has to be paid off at closing. Other issues include remaining personally responsible for leases and business loans as these renew or roll over.
Without the continued investment of time, energy and capital, it is reasonable to expect sales and profits to decline, as well as the enterprise value reduced. With a downward sales trend, it could become challenging or impossible to get long term financing from a bank, leaving limited options except seller financing, which is not a recommended option when you are retiring.
The ideal time to sell is when business is growing and at peak profitability, before a major reinvestment is required, and when you have the luxury of time to consider multiple offers. The issue is the ability to control the selling process to get a fair-market value for the many years of effort invested in your business. Unexpected events happen that can force a sale quickly. This typically occurs when the most favorable conditions are at hand, or you find yourself in a downward business trend like the recent financial meltdown. Since many business owners have much of their wealth tied up in their businesses, rather than spread out into various segments as financial advisors suggest, this can have a dramatic impact on the funds available for retirement.
Depending on the size of your business, there are many alternative ways to pursue a liquidity event, including private equity companies or small investment groups as buyers. Many times, there is an option to withdraw much of the equity from the enterprise and stay on with a limited time investment to help with the transition; other times, the process is just an outright sale. Staying on as a consultant or advisor can have tax advantages and keep the business owner engaged with someplace to go each day, without the stress of business ownership.
If you would like a confidential, no-obligation analysis and discussion of what you can be doing now to prepare for when you are ready to sell your business, please call (888-893-6661) or e-mail (bobd@dolansales.com) me. I serve customers nationwide. To learn more about my background and see customer recommendations, visit my LinkedIn profile at http://www.linkedin.com/in/dolansales.
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