Navigating any stage on the journey of business ownership is challenging. As a business owner, your focus is largely on growth, profitability and dealing with the numerous challenges of daily operations.
However, as inevitable these elements of ownership are, so is the process of ultimately exiting your business. Surprisingly, this critical retirement sale phase is often overlooked until it's imminent, leading to rushed decisions and potentially unfavorable outcomes - such as a failure to capitalise on the business’ true value.
Of course, it can be difficult for owners to think about retirement, but it is absolutely essential to plan for an exit, because you can’t always foresee when it might be about to happen.
Parting with one's baby can be a heart-searching and often painful experience. It is something most owners of family businesses do reluctantly and invariably only once. Retirement comes to people at different ages, dependent on the money involved.
As Peter Dodgson of Diverco Business Brokers says:
“I have had experience of owners cashing in their chips and retiring in their twenties. However, for most it is a factor of old age and the realisation that time is running out to do all those other things one has always wanted to do - before the limbs and mind seize up.”
Remember one thing: the best exit doesn’t necessarily mean securing the highest price for your business. Factor in the time you have left in your ‘active years’.
Let’s say you are at that point in your life where you have an estimated 10 years of ‘active living’ left - travelling, skiing, golfing, tennis etc. Would you really prefer to chop that down to 5 years, in the anticipation of an additional 20 per cent on the price you could get for the business in 12 months time?
Acting ahead of future changes in the tax regime is also cited as a reason why the highest price may not represent the optimal deal.
As the owner of your business, you may have reinvested profits and intertwined personal finances with the company's, aiming to grow and solidify its standing in the market. Often, business owners believe that selling or passing on their business will be their retirement plan. This presumption is risky.
Up to 85 per cent of an owner's net worth can be tied up in the business. However, liquidising your business's value is not a spontaneous exit strategy; it's a long-term aspiration. Crafting a detailed plan well in advance will ensure a smooth transition, preserve the business' legacy, and guarantee your financial security in retirement.
Peter Dodgson provides some first-hand insight on why it is so important to plan for an exit, both for yourself as owner and for your business’ prospects post-sale:
"...some owners can never bring themselves to the acceptance of a sale and on many occasions the business invariably suffers as the owner simply hangs on and on.”
“I well remember one owner of a well-known engineering company in the Black Country who was a young 97 years old. On arriving at his dusty office, I noticed three men in white coats in the drawing office who all looked rather alike - they would have been in their 70s. On enquiring who they were, the owner advised me that they were his three sons. I enquired further as to why they were not Directors or Shareholders - to which he replied "Early days yet - early days". The business was finally sold to a developer for houses. What a waste of a sound business…”
Many owners dream of selling the business and using the proceeds to fund a comfortable retirement. However, it's vital to be realistic. The business landscape is dynamic; market fluctuations, health challenges and other unforeseen circumstances - such as an unexpected approach from a buyer - might necessitate a quick sale. Being prepared is essential.
Preparation: If a business retirement sale is your chosen route, give yourself ample time to prepare. In our experience, between three and five years is the ideal preparation time. Prospective buyers will want detailed financial records spanning several years. This period also allows you to optimize your profit margins, upgrade equipment, maintain facilities and amplify sales revenue through avenues like online advertising. In a nutshell - taking the requisite time to increase your business’ value prior to exiting.
Realistic expectations: Potential buyers are not just buying the business in its present state; they're investing in its future. They will be on the lookout for positive but realistic numbers, indicating the business's potential to thrive going forward.
Protect your interests: Business continuity insurance can shield you from debt accumulation if you're incapacitated. It ensures the company keeps running, safeguarding its value.
Transferring your business to a family member or trusted employee may seem straightforward. However, the process demands careful consideration:
For your business to appeal to potential buyers or successors, it's paramount to augment its value while minimizing risks. The two main considerations are:
Business owners often reinvest profits, overlooking personal financial planning for retirement. This approach can be risky. With increasing life expectancies, your retirement could span decades. It's crucial to plan comprehensively in order to ensure a comfortable lifestyle during retirement.
In conclusion, an effective retirement sale plan can safeguard your legacy and provide maximum comfort in your later life. Engage with financial professionals, create a comprehensive strategy, and ensure your business continues to thrive, even in your absence.
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