Selling Your Business Started Five Years Ago
The biggest mistake a business owner can make is waiting until the closing to find out how the sale price affects the rest of their life. Yet many do this. The reality of selling a business is that nobody gets what they want exactly. Instead of one lump sum, you might have to take installments over many years (which could put your retirement at risk if the new owner stumbles). Or you might not get the tax treatment you want on the sale, so your proceeds are less than expected.
To get the final selling price that will allow you to retire, you need to start planning at least five, if not 10 or 15 years, before you want to retire. This is true whether you want to sell externally (to maximize your price) or internally. I will lay out a few key issues that need to be dealt with; what I will not do is lay out every metric to follow. You know your industry, so you should know what makes your business valuable to someone else.
Focus on You
The very first number you should understand in selling your business is personal—how much do you need for the next phase? I say the next phase because the phase is specific to you—it could be retirement, but it also could be starting another business.
The number is personal because it has nothing to do with how much you will receive for the business. This number is simply how much your family needs to live comfortably. If what you receive for the business is less than what you need to live comfortably, you have a problem.
The key to this problem is understanding it early enough that you can save more outside of the business sale (assuming you have the time and free cash flow) or try to drive the number up on the sale price. This is the reason planning should start five to 10 years ahead of an actual sale; you might need to time to make strategic changes to your business.
The Information You Need
Every business owner should have personal retirement projections calculated and an understanding of how tax issues will affect their retirement distributions before they look at selling their business. With these projections in hand, you can negotiate a sale better since you will have a truer understanding of what you must have, versus what would be nice to have. Deals fall apart when one party does not understand what they need; when you understand what you need, you can take your ego out of the negotiation.
Important in looking at what you need is understanding what you spend. If the business is covering expenses like a car or cellphone that you will now have to pay for, make sure those expenses are added back into your personal spending. I have found that most retirees will spend 100% of what they currently spend, and maybe more if they travel a lot or want to buy a second home. This spending level tends to last for the first 10 years of retirement, at which point the retirees might slow down a little.
Along with retirement projections, consider whether you want to gift some of the proceeds to charities or your children, as this might also affect the structure of a deal.
This information will help you look at your personal needs, but to maximize your sale price, you can take steps that are more than just numbers based. They are softer issues but can help drive the business value.
Create a Path for Younger Owners
One of the keys to building a business for a future sale is to create a path for people who want to climb the ladder into ownership. Companies that might buy your business want to see stable management, which starts with people who are going to stick around for five years or more to help run the business. Also, bringing in new shareholders can help you diversify your wealth earlier (which allows you to invest and grow it from there), just in case you don’t get the number you want when you sell the business.
Prepare for a Transition—Become a Teacher
As founders of a business reach their mid-50s, they need to start transitioning from being doers to being teachers. This shift doesn’t happen overnight—it often takes five years or more. The goal is to hand over the “doing” (operations, human resources, daily decision-making) to the junior partner(s) or management. You can then counsel and train younger partners and management and offer expertise and advice on any mistakes that happen.
As you transition to being more of a teacher, you will find that you have more time to do what you are good at. Most likely, you built your business through relationships. I have always believed that retiring too early is a mistake for many business owners because it is easier to leverage your relationships for the growth of the business in your 50s than in your 30s and 40s.
Entrepreneurs can drive the selling price of their business higher by spending less time on day-to-day business activities, being a proactive teacher, and using their extra time to bring in more business.
Design a Shareholder Agreement
One of the keys to bringing in new partners is having a document that explains:
- How decisions are made (so the minority shareholder doesn’t feel steamrolled)
- How the company is valued
- How a sale to younger owners is financed
- The legal structure of the organization (and accompanying tax issues)
- Who gets to buy or sell shares (in the event of a retirement, sale, disability, or death)
Think of a shareholder agreement as a prenuptial agreement: While everyone is still getting along, decide how decisions will be made in the future. You should hire a business attorney to draft the shareholder agreement. Not doing so could cost you far more later when you are called upon to rely on this document than you saved on attorney’s fees today.
You need to send the message from the get-go that a path to ownership exists for employees willing to buy into the business. One of the subtle ways to communicate this is to make sure the shareholder agreement includes a mandatory retirement age. Businesses that have a mandatory retirement age create a clear goal for the founder as well as for the junior partners.
Start at the Beginning
An entrepreneur’s road rarely comes with a map, so it is up to you to create your own. To position your business for success, build your personal wealth, and achieve a successful retirement, you need to start drawing that map at least five years from retirement—and preferably when the business starts. Preparing from the beginning means having a strategy in place to build and sell the business while simultaneously having a strategy in place to build your personal wealth. Don’t forget the personal side so that you can show up at the closing table confident that you are getting what you need.
If you have questions or would like to learn more, contact Jon Meyer at firstname.lastname@example.org.
The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.