As we approach the time of retirement for America’s largest generation, inevitably there will be cultural, social and financial events encountered on a scale unforeseen before.
One event that will become increasingly common is the selling of businesses. Right now, more than 9 million companies are in the hands of the baby boomer generation who founded them and in the next 15 years most of those businesses will need to transition to new ownership.
This generation of entrepreneurs who spent their lives building businesses is starting to cash in already. According to Standard & Poor’s analytic service, Capital IQ, deals for small and midsize businesses are rising and will continue to do so.
For the most part, these deals will not be succession transactions as a recent Merrill Lynch survey found that only one in 10 entrepreneurs expect their children to take over their businesses. So these will be business sales to non-family members.
The good news is it’s a seller’s market. Conditions are favorable for business owners to sell their enterprises. It is also a favorable climate to grow businesses, which may appeal to those who want to hold onto to their companies and increase their value for future sale.
There isn’t any bad news, but there are cautions. For many, their businesses have been their major or only source of income and the proceeds of a sale of that business will be expected to provide for them in their retirement. Such a crucial business deal must be approached thoughtfully and with restraint.
Ideally, a business owner should prepare for selling years before the business is actually put on the market. One big reason for this is that business owners tend to be the business. When the thought of selling your business crosses your mind, the first thing you need to ask yourself is will your company survive without you? Are you the CEO, CFO, COO and CIO all rolled into one? Do you have capable employees who have taken on leadership roles?
If you are not confident your business won’t flounder without you at the helm, there are some steps you can take to prepare it for saleability. One such step, if your company is large enough, is to consider hiring an outside board of directors. This will offer a fresh perspective on your business and provide leadership and guidance for years to come.
Another step is for you to transition out of the day-to-day management of the business and into a chairmanship-type position. This transition will include grooming others for the leadership roles you held. If you have loyal and capable employees, start delegating responsibilities to mentor and guide them through the process.
These steps are crucial as you not only have to assure yourself the business will survive without you, but you need to convince potential buyers of that fact as well.
After the business is set to operate without your daily governance, it is time to figure out what your retirement needs will be and evaluate the value of the company within its industry. Are you operating profitably in the arena in which your business plays?
It is important that you not only understand your company’s value, but also that you provide proof of that value. Buyers don’t like surprises, so ensure your accounting is transparent and keep it professional. Many business owners mix family expenses with business costs. Don’t do that. Ensure your family transactions are not on your business books. It is important your accounting will withstand thorough review.
While many entrepreneurs are do-it-yourselfers by nature, when it is time to put your company on the market, it is strongly recommended you attain professional help. An investment banker will not only screen out unqualified buyers for you and identify sources you would likely never uncover; they will also drive a premium for your business. Let them handle your bids while you handle the business.
Lastly, have a wealth transfer plan. Getting a check and simply divvying up the proceeds will cost you dearly in taxes. There are many strategies your investment banker can set up for you to avoid tax costs. For example, you could draw an income from the new owners. Another way is to lend money to the new owners through a note sale, where the buyers would pay you back directly. Other alternatives include stock sales and partial sales.
Whatever your business is, start communicating your retirement needs and concerns about your company’s sale with your financial adviser to maximize your return and fund a happy retirement plan.