Most business owners assume they will be able to sell their business or transition it to the next generation and retire comfortably when they are ready. After all, this is what all the previous generations of business owners have done. What you might not know is that we’re entering into the next economic “bubble.” Ten million baby boomers will be exiting their businesses over the next ten to 15 years. Finding someone to buy or take over their businesses will be harder than it’s ever been. The sheer number of business owners exiting their businesses versus the number of people willing or able to take over their businesses will create the Exit Bubble®. Understanding and preparing for this next economic trend will help business owners protect their retirement.
The Exit Bubble® creates a “buyer’s market.”
In a buyer’s market, only the best companies will sell, and the volume of businesses selling will compress valuations. When was the last time you took a realistic view at what your company might be worth? What about determining how much money you need during retirement? Have you compared those two amounts? How comfortable are you that all the years of hard work and sacrifice will sufficiently provide for you and your family throughout retirement? These are all questions you need to address well beforeyou decide to exit your business.
Timing is everything.
It’s a cliché, but very true when planning to sell your business. If you haven’t begun to plan for how and when you want to sell, you’re already behind. With the increased competition for buyers in the Exit Bubble®, you can’t just wake up one day and decide to sell. You have to prepare yourself and your business for the sale process, so when that great opportunity presents itself, you can take advantage of it. When should you start to plan how and when you want to exit your business? There’s no hard and fast rule, but business owners who have successfully exited will tell you to start planning about three to five years before you want to exit in order to maximize your value at exit. This gives you time to make changes to your business and show a track record of success from those changes. This also allows you to determine what you’ll do personally after you exit your business – a process that, if done properly, will actually help you make the critical decision on when to exit your business.
Transitioning to the next generation is not a given anymore.
According to the Family Business Institute, historically only 30% of family businesses survive into the second generation with 12% still viable into the third generation. Combine these stats with the next generation’s general disinterest in “traditional” companies and you may need to look at other exit options for your business. Also, if you want a lump sum of money when you exit, your successors may not be able to get the financing to buy the company from you. Being the “bank” for your successors’ buyout of your company may not give you enough money to retire. If you’re planning to transition your business to the next generation, make sure you consider:
- Are they willing to take over the business?
- Are they capable of taking over the business? and
- Will you have enough for retirement after you transition the business to them?
Your business may not be as valuable as you think it is.
You’ve built and run a successful business that has provided well for you and your family. That’s worth a lot…to you. What is it worth to the next owner of your business? Would a potential buyer see value in your management team? Will your customers continue with the business after you’re gone? What about your customers who have been with you for 25 years and often pay late, but always pay? Will a potential buyer be willing to take the risk that those customers will eventually pay? To understand the value of your business, you should look at it through the eyes of the buyer. Objectively assess the value of your business through the eyes of someone who doesn’t have your years of knowledge and details about the business. This can be a challenging and sometimes uncomfortable exercise for business owners, but it must be done if you want to effectively maximize the value of your business when you exit. In the buyer’s market of the Exit Bubble®, it will be even more critical to identify and address critical value detractors of your business to ensure your sale price meets your retirement needs.
Will you have enough cash?
There is a common misconception that when you retire, your spending will decrease. The opposite is generally true. You finally have time to do things other than run your business, and this can increase your spending dramatically in the first few years after retirement. You’ll need to replace (and possibly) increase the income stream that your business has provided for all those years. When you’re planning for your cash needs in retirement, don’t forget all of your expenses that were paid for by the business: health care, education, automobiles, etc. These are all costs that you’ll have to pay in retirement. With the competition for buyers in the Exit Bubble®, you may need to provide seller financing or enter into an arrangement that defers some of your cash proceeds into the future. Make a realistic assessment of the cash you’ll need for retirement when considering exiting your business. This will be important in determining how and when you decide to exit your business.
Exit Bubble® + negative economic trends = decline in funds for retirement.
We’ve all been watching the news lately and hearing about the coming economic trends: increasing taxes, increasing interest rates and increasing regulatory environment. Combine these trends with the challenges of the Exit Bubble® discussed earlier and you’ve got the perfect storm. When planning for what you need in retirement, don’t forget to take into account the potential negative impact that these economic trends will have on your retirement funds. Forecast worst case scenarios and compare them to your current plans for exiting your business. Make sure you take a realistic view on your family’s needs and wants before entering into the exit process.
All of these points focus on one thing – preparation is critical to a successful business exit. Take the time now to properly prepare yourself and your business to succeed in the Exit Bubble® and protect your retirement.
May 14, 2014
By Tensie Homan