Thinking about retiring? How to plan your exit

How will you exit? Consider the three Ss

In general, entrepreneurs can exit a business for retirement in three ways. Each comes with its own set of emotional and financial considerations. 

1. Succession

Consider selling the business to a family member, management team, key employee or even someone 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, and your family are already familiar with the business. It can help ensure that employees are cared for and that you ease out gradually.

2. Selling

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 be time-consuming, so be prepared. 

Consider hiring a firm to look for buyers on your behalf. You will need to put together an information package for potential buyers that includes the company’s background, valuation and financials. It can take time to sort through offers and find one right for you. 

The next step is to perform due diligence with that buyer, which will also take you away from your work. Prepare for the process or delegate parts of it. Deals often fall apart during due diligence, so be prepared to return to the drawing board.

How will you be involved after the sale?

As a seller, you must decide the transition you wish with an outside buyer. 

Do you want to exit completely, or will you offer to stay on contract for a certain period (this is very common)? 

Will you be prepared to hold a vendor note, a loan the seller gives the buyer to cover part of the sale price, or will you insist on an all-cash offer?

Most outside sellers will want a vendor note of some sort. It keeps the seller tied to the company during the transitionary phase and can help the sale.  

3. Shutting down 

Some entrepreneurs believe their business has no “saleable” value, and shuttering it is their only option. However, 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 close up shop. She recalls a friend who thought her business had no value. The friend got a professional to help sell her client list to a competitor. The purchase price was based on a percentage of the revenue earned from those clients over several years. 

“Even if your business is on the ‘asset-light’ side, keep in mind that your client list or other intellectual property has value,” Hipson says. “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 improving your valuation. 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 and get the best price. The earlier you take these steps—ideally at least five years before retirement—the better your result will be.

1. Understand how your industry sets valuations

Different companies are valued differently depending on the industry in which they operate.

It would be best if you understood how businesses such as yours are valued externally. Is it based on a multiple of EBITDA, which is earnings before interest, taxes, depreciation and amortization (which helps evaluate a business’s core profitability)? Or on a multiple of revenue?

Once you understand what builds value in your business, you can 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 early advice can help you understand these differences. You do not want to find out your business is worth much less than you thought before you put it 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 company’s day-to-day, empower 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 vital, it gives outside buyers complete confidence in the presented numbers. 

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 firm’s value. You can achieve this by keeping a lid on operating costs and avoiding unnecessary expenses, especially those linked to the owner’s lifestyle, which can add up over time. One example is vehicles used for both business and non-business purposes.

Next step

Learn how valuation affects buyers and sellers when determining a fair price for a business transfer. Download BDC’s free Business Valuation, a guide for entrepreneurs.