Who will buy the business?
The value of a Business is a part of the owners’ retirement portfolio. And that is the dilemma.
In financial planning speak it is most likely a part of the income portfolio or Dividends and is not categorised as a liquid asset.
From a taxation perspective the structure dictates if the earnings are PAYG, Distributions or trust income. Regardless of the technical disbursement most small and medium-sized businesses support a lifestyle.
However, there is a risk in relying too heavily on your business valuation calculation.
There is a complication that other asset classes don’t have in the potential buyers of these businesses are Generation X and millennials, and their idea of a business is very different to the Baby Boomer sellers.
The concept of a good business to the boomers is one where you work hard and thinking 24/7 about the business is normal. They are prepared to make a sacrifice for ‘the family’, but it’s worth it to support a lifestyle.
In fact the value to the individual is they are the business and it’s a badge of honour to be like this.
But the buyer’s are saying you are crazy. I don’t want that ‘lifestyle’ and there is a better way.
It’s a generational gap and the buyers are in the box seat.
You could argue, as the seller, that they are wrong and it can’t be done (cake and eat it) but that’s like a parent arguing that the teenager should not have a social media account. It’s a fruitless argument.
We will explore a few of the options available to the business sellers and how they might approach the sale of their business as they get closer to their retirement.
The Conundrum of Mindset
The difference in mindset between the seller and the buyer creates a conundrum for the seller who must decide whether to:
1. Invest in their business to increase its value; or
2. Accept a lower valuation and focus on extracting profits.
The choice is driven by the nuance of the seller’s situation.
How much time do they have?
What is their health like?
What is their debt level?
What is the non-business asset portfolio?
Assessing your Retirement Portfolio
The decision to invest in your business depends largely on the percentage it represents in your overall retirement portfolio.
The business is less than 30%
If your business makes up less than 30% of your retirement portfolio, it may not be worth investing significant time, effort, or money into the company.
The business is between 30% and 60%
When your business is between 30% and 60% of your retirement portfolio, the decision to invest becomes more complex. You’ll need to consider the potential for asset growth or revenue growth carefully before making a decision.
The business is more than 60%
When your business accounts for more than 60% of your retirement portfolio, a discounted sale price could have a substantial impact on your retirement plans. In this case, investing in your business may be necessary to maintain or increase its value. Or strip as much revenue out and place that into an alternative asset class.
Options for the Business Owner when Selling
Business owners have several options when considering the future of their company:
Running Down the Business
One option is to accept that you don’t want to invest further in the business and focus on extracting as much profit as possible in the coming years. This approach may result in a significantly discounted valuation at time of sale but by then you will have extracted and invested the revenue.
Minimal Investment and Going It Alone
Another option is to invest minimally in improving profitability and efficiency without seeking external advice. This approach may involve cutting expenses and focusing on short-term profits rather than long-term legacy. If you’ve rarely reinvested into your business then this may be abridge too far.
Remove yourself from the value calculation
Work systematically on a strategy to achieve a sale price target in 3 to 5 years. Approach it with a strategic plan to create a business that is attractive to the buyer.
Work with a group of professional advisors who specialise in helping business owners increase their company’s value by extracting the owner from the value calculation.
This approach has a bonus for owners who want to retain the business’s legacy, and make it attractive to purpose-led buyers.
A growing group of buyers who want to make an impact, not just money.
And it’s this last point that many boomers scoff at, but it’s the alternative to the burnout model.
Your business was conceived in the 20th century and it is no longer fit for purpose in the 21st century.
Start Early or Even Better - Now
Start now, at least in deciding which approach you want to follow.
Navigating the future of your business and its role in your retirement portfolio can be challenging. Just like the narrative about starting early to save for your retirement, the same message is to start early on your exit strategy.
It will arrive quicker than you think if you’re not prepared.