Wow, where did the time go? I just started my business… Wait that was 1979. It is now 2014. Boy time sure goes by fast. The kids all have families of their own; my oldest has been with me in the business for over 15 years.
I am ready to retire.
But can I? Or better yet, how can I retire?
Sound familiar? Retiring from your small business may be harder than you think. Generally, most small business owners fall into three main categories when it comes to retirement.
- Selling the business is their retirement package
- They have no exit strategy
- They are the business and without them, there is no business
- Planning for retirement would always happen after the business reached a certain point
Well actually there are four categories and that just goes to show that a lot of business owners really do not plan ahead when it comes to retiring from their business.
Selling the business
If selling the business is your retirement plan, there is a lot to consider. Probably the most important is the cash value of your business. To you as the owner, there is an emotional attachment and that may mean you think it is worth more than it actually is. You have built the business to what it is today and it is worth twice what you are asking. Besides, you need to sell the business at that price to fund your retirement. But what is your business actually worth?
There are several ways to put a price tag on your business. There is the assets and goodwill approach where you sell the tangible assets at a fair market price and add to that the value of your customer base and other intangible assets. It is fairly easy to determine the price of the tangible, not so much the intangible.
There are different formulas used to determine the price of a business. They range from a multiplier of monthly or annual sales plus inventory, a multiplier of EBIDTA (earnings before interest, taxes, depreciation, and amortization), to valuations based on cash flow and more. One way to understand the value of your business is to find out the selling price of others in your industry.
A quick side note here is that you need to have good accounting practices and accurate bookkeeping to even begin to determine the value of your business.
Once you have a price in mind, how are you going to sell it? First is the easiest: the outright sale. Buyer comes up with the cash, you take it and the transaction is completed. This works if you are selling the assets or the stock of the business. A second method is selling to the employees through a stock purchase plan or you can sell it on contract in essence, financing the purchase of the business yourself. There is even the option of handing the business to partners or family members while retaining equity in the company and receiving monthly dividends or payments.
Having no exit strategy
Not having an exit strategy basically means they are going to carry you out of your business in a horizontal manner. Not a bad thing, except it leaves a lot of problems for those that have to clean up after you. It could also mean that when you are ready to retire, you just close up shop and go home. Either way, unless you have been able to save money, your business is not going to be much help in the way funding your retirement. You may have some assets to sell but how much are they worth?
You are the business and without you there is no business
If your business is not worth anything if you leave, then you cannot expect to sell it for a good price. There are ways to avoid this by making sure the business can run without you, even while you still own it. Let’s face it, you wear lots of hats and not a day passes where you are touching almost every part of your business. Now is the time to start working on a plan so your company can run on its own.
I can start my retirement planning after…
Procrastination is debilitating. There will always be something that comes up to distract you from your plans. What more needs to be said?
Pick your exit door
Do you want to sell your company, transition the leadership, or walk away? You must decide how you want to exit your business and begin preparing for that day – even if it’s ten or twenty years from now. If selling is the exit door you want to go through, then start looking at your company as an asset and make it shine in its culture, financial reports, and how it operates. If you choose succession to family members or employees, you must do the same as selling, but with extreme emphasis and clarity on what the company will look like after you step down. It is also important to identify someone with the abilities to carry on after you and begin training them.
No matter what your path to retirement is, here are some important aspects to consider:
- Start saving now. Either through an IRA, 401K, or other vehicle
- Get your business bookkeeping in shape, up to date and accurate
- Make sure your business can run without you
- Seek advice about the sale of your business from qualified professionals
- Find a good financial advisor that specializes in small business as well as retirement
Check out your local Small Business Development Center for all your business needs, whether you are retiring or not.