As it stands today, roughly 12 million Baby Boomers own some type of small business, the combined value of which is roughly equal to $10 trillion. This comes at a time when the oldest of them have just crossed into their seventies.
This poses a challenge, as many business owners tend to wait until the last minute to plan their exit. The challenge is compounded by the fact that small businesses can be difficult to value, while the pool of potential buyers is small. A delay in starting the planning process may mean a delayed retirement.
If transitioning to retirement is on the horizon in the next three to five years, now is the time to start developing a succession plan and tackling all the intricacies involved in valuing your business and eventually extricating yourself from it.
Establishing a Valuation
For small businesses especially, establishing fair and accurate valuation can be a difficult and fraught process. But experts agree the first step is to get your books in order. This valuation should reflect assets, monthly earned revenue, monthly expenses, tax reports and all the other factors that figure into your profit and loss statement.
Who’s Buying What You’re Selling
Depending on the size of your business and market you’re operating in, you can go a number of different directions. These include selling to a child or relative, a partner, an employee, or to someone unrelated but who has a connection and personal knowledge of the business, and thus some appreciation of its underlying value. Competitors may also be interested, especially in industries that are consolidating or where growing in scale confers a benefit.
Turning a Business Interest into Retirement Income
For most business owners, the sale is just the first step in realizing the goal of a establishing a retirement nest egg. There are multiple ways to cash out, including:
Cash sale: Once a successor is identified, you may want to sell your shares in the company, thus allowing them more freedom to take the reins as you prepare your exit and next steps into retirement.
Buy-sell agreement: This gives your partner the opportunity to buy your shares when you leave. This arrangement creates an added layer of stability and predictability ensuring your anticipated future income and that the business continues to operate without interruptions after you leave.
Outright sales: In the case of a sale to an outside entity, this is frequently the best option, providing you with a fast and straightforward exit from the business and money in your pocket.
Once the sale is completed, the cash can be re-invested to generate an income stream for your retirement years.
Get the Jump
Many small business owners never plan to retire. Others think about it constantly. Most are somewhere in between. All can benefit from a structured planning process that helps the owner envision what retirement will be like.
Ideally, this would start at least three years in advance of the decision to step aside. This will give you time to seek out advice from legal, financial and tax experts with experience in similar transactions. It will allow you to better understand the valuation process, and to assemble your list of potential buyers. Finally, it will allow you to prepare for the day you step through that door for the last time and start out on the next phase of your life.