Thinking about retiring? How to plan your exit
Many entrepreneurs find it hard to think about leaving their business when they’ve poured their heart and soul into it for so many years. As a result, planning for an eventual transition is often left to the last minute.
“Overseeing the daily operations of your business can be challenging enough. It's hard to find time to think about your exit plan as a business owner,” says Jade Hipson, Senior Account Manager at BDC. “Starting an exit plan in the years before your anticipated exit will give you a better chance of departing on your own terms when the time comes.”
That “time” can seem a long way off, especially since many entrepreneurs stay involved in their businesses well into their 60s and 70s. Even so, preparing early for retirement gives you more opportunities to explore your options and maximize the value of the business.
How will you exit? Consider the three Ss
In general, there are three ways entrepreneurs can exit a business for retirement. Each comes with its own set of emotional and financial considerations.
You might consider selling the business to a family member, your management team or a key employee, or even someone that you handpick from your network. This is a good option if you care strongly about how the business will carry on after you leave—keeping the same vision and values you built into it.
An internal succession is also more likely to result in a smooth transition since managers, employees or your family are already familiar with the business. This can help ensure employees are taken care of—and can let you transition out gradually, which can be easier on you and the company.
Selling to an outside buyer could allow you to walk away with a very comfortable nest egg: An outside buyer is more likely to offer a higher sale price.
However, outside sales can often be more turbulent than other choices. If you’re concerned about the legacy or longevity of the business, you should take the time to find a buyer whose values align with your own.
Selling to an outside buyer can often take a significant amount of time, so be prepared.
You may want to consider hiring a firm to look for buyers on your behalf. You will need to help put together an information package to share with potential buyers on the background of the company, the valuation, the financials, etc. It can take time to sort through offers as they come in and find one that is right for you.
The next step is to perform due diligence with that buyer, and this can also be distracting and time consuming. Ensure you are prepared for the process and/or have people assigned to deal with pieces of it. Deals often fall apart during due diligence, be prepared for this and potentially having to go back to the drawing board.
What will be your involvement after the sale?
As a seller you need to decide what type of transition you want to have with an outside buyer.
Do you want to exit completely, or will you offer to stay on for a period of time on contract (this is very common)?
Will you be prepared to hold a vendor note or will you be insistent on an all cash offer? Most outside sellers will want to have a vendor note of some sort to keep the vendor tied to the company during the transitionary phase and be aligned to help the seller succeed.
3. Shutting down
Some entrepreneurs think this is their only option, believing their businesses have no “saleable” value. But intangible assets, such as intellectual property (IP), should not be overlooked.
Get a professional valuation
Hipson says it’s important to get a professional opinion about the value of your business—especially before deciding to simply close up shop. She recalls a friend who thought her business had no value. The friend got professional advice who helped her sell her client list to a competitor, with a purchase price based on a percentage of revenue from those clients paid over a period of years.
“Even if your business is on the 'asset-light' side, keep in mind that your client list or other intellectual property has value,” says Hipson. “You may be able to leverage these assets to creatively negotiate more value for your company when you retire.”
Your advisor can also offer recommendations on how to improve your valuation, and if you’ve started early, you have time to implement them and raise the value.
Increase the value of your business
If selling your business is part of your retirement plan, there are ways you can increase its value to get the best price. The earlier you take these steps—ideally at least five years before your retirement—the better the result you’ll achieve.
1. Understand how your industry sets valuations
Different companies are valued differently depending on the industry in which they operate.
You should have a good understanding of how businesses such as yours are valued externally. Is it based on a multiple of EBITDA? A multiple of revenue?
Once you understand what builds value in your business, you will be able to work on a plan to achieve a higher valuation. If your company sells on a multiple of EBITDA, you will want to look for ways to improve this over the next few years.
Business owners often have a different perception of the value of their business from what a buyer is willing to pay. Seeking advice early can help you understand these differences. You do not want to find out your business is worth much less than you thought right before you put your business up for sale.
2. Make yourself replaceable
As the founder and owner of your business, you’ve played an essential role in its growth, success and character. But prospective buyers can’t buy you. They are buying your operations. If you’re still heavily involved in the day-to-day of the company, start empowering your management team to make decisions without you. Think about stepping down as CEO a few years before your retirement so your successor has a chance to prove their capability.
3. Keep detailed and reliable financial reports
Potential buyers typically want to track the financial performance of the business over at least the previous three years, according to experts. While a three-year audit trail may not be absolutely necessary, it gives outside buyers complete confidence in the numbers being presented. Failing that, three years of financial reports prepared under a review engagement (the second-highest level of financial statement prepared by a certified public accountant) would be considered adequate.
Reliable reports showing a healthy cash flow leading up to the transfer of ownership will go a long way towards maximizing the value of the firm. It can be achieved by keeping a lid on operating costs, but also by avoiding unnecessary expenses, especially those linked to the owner’s personal lifestyle that can add up over time. One example is vehicles used for both business and non‑business purposes.