Is Your Business Your Retirement Plan?
By ActionCOACHMark McNulty
You’ve probably seen the statistics, read the stories, and perhaps lived the reality. The American population is aging, as baby boomers hit retirement age at the rate of 10,000 per day. This means that the owners of many small and medium sized businesses are reaching retirement age as well. Although business owners tend to stay in the work force longer than traditional employees, the numbers looking to sell and get out over the next 10-20 years are staggering. The good news is that with the economy improving and the job market going through massive fluctuations, there are more potential buyers than ever, as people of all ages are looking at business ownership as a way to take more control of their lives. The bad news is that most business owners I speak with have a significantly inflated view of what their business is worth.
So what does it take to maximize the value of your business? While there are different methods for formally calculating the value of your business, including assets, liabilities, brand recognition, and cashflows, there are two overriding themes that will always have the largest impact on your valuation. The amount of free cashflow your business generates is the first, and the extent to which your business requires you to be involved to create those cashflows is the second. When a buyer (at least a smart one) is looking at your business, they aren’t really buying your business; they are buying your current and future cashflows. They will want to know how much cash they can generate both today and tomorrow as their return on investment for the purchase. Today’s net cashflow is easy to see, while the future cashflow is projected. One of the biggest factors in the future cashflow is how deeply your business depends on you to be there to sustain it.
One of the most common questions I get from owners in this position of needing to cash out for their retirement lifestyle is when should they start planning for selling. Other than the obvious answer of NOW, I usually tell them that 5 years is a good starting point, and then talk about what they need to do to prepare in the two key areas.
Improving cashflow is Business 101, and there are no mysteries on what you need to do to make improvements – sell more and/or make more money per sale and manage your overhead expenses. There are dozens of ways to make improvements in each of these areas, you just have to make the decision to go about improving in a disciplined, focused and sustained manner.
The second area is a little harder, but equally important – getting your business to run as well without you as it does with you. Are you the best salesperson, or the top technical expert? If so, then you need to start developing your team to be able to sell and produce without you doing it for them. Will your clients stay if you leave, or will they be loyal to the company and not just you? Will your key employees stay as well? It can easily take 2-3 years to develop the management and leadership necessary to sustain a business after the owner leaves. What are you doing right now to build your team? You need to lower your value to the business and raise your team’s value to maximize your business as a retirement asset. If you are the biggest asset, and you are leaving, what is left to buy?
If you are one of those planning on your business providing the funds for your post-ownership lifestyle, I encourage you to establish a relationship with a business wealth planner, one who specializes in exit planning for business owners. Your business wealth planner can help you to put together a plan that maximizes your retirement options by combining the traditional retirement plan (save a bunch of money), with maximizing the value of your largest asset, your business. They are trained to help you understand the value of your business, its role in your retirement plan, and the value drivers you can work on to maximize the value of the business when it comes time to sell.