Jim Marren
What role will the sale of your business play in your retirement income plan? If you are like most business owners, the answer is usually none.
How can this be? A profitable business that has been in business for many years should be the business owner’s most valuable asset.
There is no reason why this asset should not be used as a major component of a business owner’s retirement income strategy.
Most business owners spend more time working “in” their business and not “on” their business. The business does not function without the owner. We call this a practice, not a business.
A practice usually dies with the owner, whereas a business can live on after the original owner has left.
We value “practices” at zero when creating retirement income plans for our clients. We believe that all business owners should be able to monetize their hard work.
We have found there are some basic steps you can take to realize full value when selling your business.
Begin with the end in mind
Most business owners we know began their business after years of working for someone else. They were good lawyers, doctors, electricians, etc. who were tired of being employees. They wanted to start a business so that they could do it their own way.
Once they started, they typically realized that running the business is much different than they thought it would be. They spend time on things they never thought about such as insurance coverage, employee benefits, book keeping, etc.
Instantaneously, they are sucked into the whirlwind of their business. They work like they have never worked before in an attempt to keep the business afloat.
During this process, the business plan, if any, goes out the window. Survival becomes the only thing that matters.
After going through this process myself, I recommend to aspiring business owners to visualize the lifecycle of their business before launching.
Do they plan for this business to last forever or only to exist as long as the business owner decides to run it? What will the business be known for? What is their unique value proposition? How big will the company become? How many employees and locations will there be? And finally, what is the exit strategy?
These questions are not easy to answer. It’s been my experience that the answers typically change many times during the lifetime of the organization.
I’ve found that owners who have gone through the process of strategic planning regarding their exit strategy are significantly more prepared and typically more successful in selling their businesses than owners that do not.
3-5 YEAR PLAN
You should ask yourself the following questions: To whom will I sell my business? Family or non-family member? If family, do they have the skill set required to run your business?
If not, determine what needs to be done to qualify them. Do they need to go college or trade school? What will their role be prior to the transition?
I’ve found the most successful family business transitions happen when the buyer has an opportunity to work at every job in the business.
This allows them to get a full understanding of how everything works. This works particularly well when you plan to have your children purchase your company.
It also helps children earn the respect of the other employees at the business. Sometimes employees do not like the idea of working for the boss’s child. They do not believe the child is “qualified” to be their boss.
We have seen situations where the child has had to fire tenured employees because of their lack of respect for the successor. Most employees will not behave this way if they believe that child is ready to lead.
If a non-family member, how will you locate the buyer? Do you have a key employee who would be qualified and willing to buy your business?
I have noticed that many of our clients who are business owners do not like the idea of grooming a non-family key employee as their potential successor. Why? Doesn’t it make sense to develop someone who is intimately familiar with the day to day operations of the enterprise?
This key employee is someone the owner has a relationship with and this person is typically experienced with working with the company’s employees and customers.
The familiarity with this key employee could possibly make the owner more comfortable with an installment sale of the business which potentially can make the owner more money.
I have found that the owner’s biggest concern is that their key employee will one day leave the company to start their own company.
They fear that by empowering this person, they are grooming their competition. This is a legitimate fear but I’ve found with proper planning you can protect yourself.
Non-qualified deferred compensation plans with vesting schedules and a non-compete contract is a good place to start.
A good business attorney can also walk a business owner through tools such as these.
If you do not have an employee qualified and willing to buy your business, do you have a relationship with a competitor who might be interested in acquiring your business?
I recently had a client approached with an offer to buy their company from a national competitor. The owner had developed a professional working relationship with the national company over multiple years.
They liked the fact that they could be cashed out all at once due to the deep pockets of their acquirer.
The two negatives were the business was absorbed and rebranded immediately and the business owner was contractually not allowed to compete in the same industry for a contractually determined amount of time.
WHAT’S NEXT?
Plan to retire, start a new business, go to work for someone else? The biggest mistake a business owner can make is to sell their business without knowing what the next chapter of their life will be.
If retirement is the answer, it makes sense to work with certified financial planner to determine if your assets are sufficient to meet your retirement income goals.
Planning is the key to maximizing the value of your business. You have the opportunity to receive value for your creation. Get your team together and start today.
Jim Marren is a certified financial planner at Reno Wealth Advisors in Reno. Contact him at 775-321-6200 or jim.marren@raymond james.com. Raymond James and its associates cannot act as intermediary in the purchase or sale of a business. Please consult with a legal and tax professional with questions regarding that process.
